Pound US Dollar (GBP/USD) Exchange Rate Trended Broadly Lower
The Pound US Dollar (GBP/USD) exchange rate tumbled last week as the Bank of England (BoE) was noncommittal in its latest monetary policy statement and US data printed mixed. An intermittent risk-off mood attracted support for the safe-haven US Dollar (USD) initially, although GBP/USD rebounded at the end of the week as US payrolls disappointed.
At the time of writing, GBP/USD is trading at $1.2745, having fallen by 0.75% over the course of the week.
Pound (GBP) Weakens in Anticipation of BoE Hike
The Pound (GBP) trended lower through the majority of last week’s session ahead of the Bank of England’s interest rate decision.
At the start of the week, GBP headwinds were fuelled by diminishing bets for a 50bps interest rate hike. Fears of a UK recession tempered rate hike enthusiasm, as Monday’s data revealed that consumer borrowing increased in June by more than expected.
Moreover, a risk-off mood depressed the Pound. Worse-than-expected data from China – the world’s second-largest economy – may have triggered bearish sentiment in the markets.
Midweek, a lack of data exposed Sterling to further losses – but the Pound rebounded on Thursday after an initial downturn, as the BoE hiked interest rates by 25bps.
The move was considered dovish at first, as the central bank’s preference appeared to be keeping rates higher for longer rather than enacting successive hikes. Nevertheless, GBP morale soon rallied as BoE Governor Andrew Bailey left open the option of further hikes ahead.
An optimistic speech from the Bank’s Huw Pill may have served to keep Pound investors upbeat on Friday:
‘The MPC is committed to achieving its target,’ Pill told an online audience; ‘There are increasing signs that the policy actions it’s taken over the last 18 months are working in pursuit of that target.’
US Dollar (USD) Depressed as Data Misses Target
The US Dollar was buoyed through part of the week as a bearish market mood attracted safe-haven support to the currency.
Underwhelming US data reinforced risk-off sentiment: Monday’s Chicago PMI printed 0.5 below expectations, while July’s ISM manufacturing PMI and June’s job opening figures also disappointed.
Midweek, ADP employment change for the month of July surprised to the upside, revealing that 324,000 were created rather than 189,000. The indication of strength in the US labour market buoyed rate hike hopes and perceptions that the US economy would be able to hit a ‘soft’ landing.
On Thursday, the BoE’s interest rate decision dominated headlines, and initially allowed USD/GBP to climb to a monthly low amid GBP investors’ apprehension. Nevertheless, the Pound rebounded following the hike and the ‘Greenback’ encountered headwinds as the US ISM PMI missed forecasts.
At the end of the week, USD losses were deepened by July’s nonfarm payrolls. Contrary to Wednesday’s data, the release signalled a cooling labour market: analysts reported that together, June and July represent the two weakest monthly gains in two and a half years.
GBP/USD Forecast: Inflation, GDP Data Upcoming
The GBP/USD exchange rate will likely be directed this week by US inflation data on Thursday and UK GDP on Friday.
Core inflation in the year to July is expected to weaken slightly – ordinarily an indication that the need for tighter monetary policy is waning – yet headline inflation is expected to increase. Such mixed data may cause GBP/USD to fluctuate.
Meanwhile, UK GDP is forecast to reveal economic growth in June; although preliminary data for the second quarter looks to reflect a stagnating economy. The Pound may weaken if Q2 data prints as expected, fuelling fears of a domestic recession.
Elsewhere, a consecutive rise in UK retail sales may help buoy GBP earlier in the week, while the ‘Greenback’ could face downward pressure from a fall in Friday’s consumer sentiment release.