The Pound US Dollar (GBP/USD) exchange rate fell by almost 2% last week, following a sharp cooling of UK inflation.
What’s Been Happening: Pound Crashes amid Cooling Inflation
After a slow start to the week, the Pound (GBP) saw volatile trade on Tuesday. Ahead of Wednesday’s inflation print, investors appeared split on the prospect of further tightening from the Bank of England (BoE).
Both core and headline inflation eased below expectations on Wednesday, triggering a sharp sell-off in Sterling. The headline consumer price index printed at 7.9%, a marked drop below forecasts of 8.2%, while core CPI cooled to 6.9%.
These readings led to markets readjusting their expectations of further interest rate hikes, with economists now expecting a more modest 25bps hike from the BoE next month.
These diminished bets capped Sterling through to the end of the week, with a lack of data on Thursday preventing a recovery.
Friday saw Sterling trade listlessly, despite sales growth eclipsing forecasts of a 0.2% increase. In June, sales growth rose by 0.7%, but did little to cheer GBP investors.
Meanwhile, the US Dollar (USD) saw some support at the start of the week, before benefitting from GBP’s post-CPI rout.
Furthermore, strong jobs data indicated persistent tightness in the US labour market, sparking bets on further hikes from the Federal Reserve. Safe-haven flows then cemented GBP/USD’s losses on Friday.
Three Things to Watch Out for This Week
- Fed Interest Rate Decision
Wednesday brings the Fed’s latest interest rate decision, wherein a 25bps hike is expected. Could this boost USD? Or will some dovish forward guidance pull the US Dollar lower?
- US GDP
Thursday sees the release of the US Q2 GDP data. Growth is forecast to have slowed on a quarterly basis, but remain strong, which may temper USD
- UK PMIs
In the meantime, softer-than-expected UK PMIs leave the Pound on the defensive at the start of the week.
GBP/USD Outlook
On Friday, the Fed’s preferred inflation gauge, the core PCE price index, is forecast to have cooled in June, which could pare rate hike bets and weaken the ‘Greenback’.