The Pound US Dollar (GBP/USD) exchange rate hit a 14-month high last week, following disappointing US labour data.
What’s Been Happening: US Dollar Erases Gains on Disappointing Non Farm Payrolls
The US Dollar (USD) opened last week on the defensive. USD investors were disappointed after June’s ISM manufacturing PMI printed below forecast.
Independence Day closures prevented the ‘Greenback’ from a swift recovery. However, on Wednesday, hawkish indications from the FOMC minutes provided some tailwinds.
This momentum carried through to Thursday, wherein the ISM services index and jump in ADP employment turbocharged Federal Reserve interest rate expectations.
The US Dollar then fell sharply on Friday, following the latest US payrolls release. June’s figures printed below forecast, with the slowdown in the US labour market weakening Fed rate hike bets and leading GBP/USD to strike a 14-month high.
Meanwhile, the Pound (GBP) continually firmed over the week despite a lack of data drivers. Bank of England (BoE) interest rate hike bets were the primary cause, with GBP investors betting on another 50bps hike in August.
However, this carried a double-edged sword – anxieties around overtightening served to cap Sterling’s gains.
Three Things to Watch Out for This Week
- UK Wage Growth
The latest batch of wage growth data is due to print on Tuesday. The key inflationary pressure is forecast to increase, which could boost BoE rate hike bets and the Pound in tandem.
- US Inflation
Both headline and core inflation are forecast to have cooled in June, which may weaken the US Dollar when they print on Wednesday.
- UK GDP
Thursday brings the release of May’s GDP data. Will a sharp contraction in May weigh on GBP?
GBP/USD Outlook
Elsewhere, the latest unemployment rate for the UK is due alongside the wage growth data. A hold is forecast for May, which could indicate a tight labour market. Because of this, and wage growth remaining hot, the case could be made for further tightening, strengthening GBP.