Pound US Dollar (GBP/USD) Exchange Rate Remains Elevated
The Pound US Dollar (GBP/USD) exchange rate hit a fresh 15-month high at the end of last week as UK GDP data impressed. As the weekend draws to a close, GBP/USD retains its recent gains: however, impressive US sales growth could send the exchange rate tumbling next week.
At the time of writing, GBP/USD is trading at $1.3089, having jumped almost 2% in the past seven days.
Pound (GBP) Buoyed by Recent UK Data
The Pound (GBP) is clinging on to last week’s gains so far this weekend, following impressive UK GDP data published on Thursday.
Ahead of the economic release, Sterling found support on May’s employment figures. Although unemployment rose beyond expectations, average earnings increased, boosting GBP morale. Furthermore, the data suggested that inflationary pressures remain strong, increasing the likelihood of an aggressive monetary policy response from the Bank of England (BoE).
Midweek, economists’ reaction to the BoE’s latest financial stability report was mixed. All major banks in the UK passed their stress tests, demonstrating enough liquidity to withstand another global slowdown; yet the central bank warned that Britain’s economy would come under further pressure ahead.
Toward the end of the week, UK GDP for the month of May printed at –0.1% rather than –0.3% as forecast, and on an annualised basis also avoided forecasts of a 0.7% contraction. News that the extra bank holiday for King Charles’s coronation had affected economic activity by less than expected buoyed Sterling, although tailwinds were capped by the lack of growth across various sectors.
Commenting on the data, UK Chancellor Jeremy Hunt struck a determined note:
‘The best way to get growth going again and ease the pressure on families is to bring inflation down as quickly as possible. Our plan will work, but we must stick to it.’
US Dollar (USD) Crashes as Inflation Misses Forecast
The US Dollar (USD) plummeted against the Pound last week, to levels not seen since April 2022. Fuelling the downtrend in the ‘Greenback’ was a disappointing inflation release on Wednesday, followed by a weaker-than-expected PPI reading the day after.
As rhetoric from the Federal Reserve becomes more dovish, USD investors had hoped for a significant increase in inflation to bump up the likelihood of further interest rate hikes. Instead, the Consumer Price Index (CPI) showed that prices in the United States rose by a meagre 0.2% month-over-month in June 2023.
Economists at ABN Armo Bank summarised markets’ consensus following the release:
‘The report gives us greater conviction that July will be the last hike of the current cycle, with a September hike looking unlikely assuming current data trends persist.’
On Thursday, a further disappointment was manifest in June’s wholesale inflation report, which revealed that producer prices for final demand edged up 0.1% month-over-month in June rather than the 0.2% forecast.
The US Dollar subsequently ended the week subdued against its peers as Friday’s impressive consumer sentiment reading failed to generate much enthusiasm.
GBP/USD Exchange Rate Forecast: UK Inflation to Soften Likewise?
The Pound US Dollar exchange rate could come under pressure this coming week, as Wednesday’s UK inflation report is estimated to show a slowdown in domestic price rises.
If inflation in Britain follows the trend set by the US last week, investors may fear the Bank of England could backpedal on former hawkish statements. On the other hand, easing inflation would be a relief to UK economists, making it possible for businesses and consumers to resume activity.
Elsewhere, retail sales in the US are expected to have increased in June, possibly lending the ‘Greenback’ a boost. UK retail data doesn’t print until the end of the week and looks to be less upbeat, with a slowdown in growth forecast. Consequently, GBP/USD may tumble.