Pound US Dollar (GBP/USD) Exchange Rate Flattens as US Core CPI Cools
Article updated 16:10, 13/09/2023:
The Pound US Dollar (GBP/USD) exchange rate has recovered this afternoon, following a cooldown in US core inflation.
While US headline inflation increased beyond expectations, the measure which ignores volatile products such as fuel cooled significantly. Because of this, USD investors began to pare back their bets on additional interest rate hikes from the Federal Reserve.
However, Sterling appears unable to press the advantage and gain ground over USD, likely because of this morning’s dismal GDP data.
At the time of writing, GBP/USD is trading at around US$1.2491, showing little movement from the morning’s opening rates.
Original article continues below:
Pound US Dollar (GBP/USD) Exchange Rate Slips amid Shock UK GDP Contraction
The Pound US Dollar (GBP/USD) exchange rate is weakening this morning, following a larger-than-forecast UK GDP contraction.
At the time of writing, GBP/USD is trading at around US$1.2467, falling by roughly 0.2% from the morning’s opening rates.
Pound (GBP) Sluggish amid Shock GDP Contraction
The Pound (GBP) is off to a sluggish start this morning, following a larger-than-forecast contraction in the UK economy.
The UK’s GDP figures for July printed at -0.5%, significantly lower than -0.2% and reflected a contraction. The surprise downturn was likely prompted by poor weather and continued strike action amongst the private sector.
Additionally, the bleak reading is sparking recession jitters amongst investors. Paul Dales, Chief UK Economist at Capital Economics, commented that:
‘The unusually wet weather also played a part in the 0.5% m/m decline in construction output. But with output declining in 11 of the other 16 sectors, there is an air of underlying weakness. That would make sense given that the dampening effect of higher interest rates should be starting to be felt a bit harder now and when other indicators, such as the activity PMIs which exclude the drag on public sector activity from strikes, are also pointing to recession.’
With the Bank of England (BoE) likely to pursue a 25bps hike in September, the likelihood of recession seems greater.
US Dollar (USD) Firms Ahead of CPI Data
The US Dollar (USD) is firming this morning, as investors look ahead to the afternoon’s consumer price index data.
Economists are currently forecasting a mixed bag, with headline inflation expected to rise, while core CPI cools.
If core inflation cools as expected, it may weigh heavily on the US Dollar by fuelling expectations of a pause from the Federal Reserve.
However, some anticipate the data to prompt a hawkish stance from the Fed. Chris Turner, at ING, commented:
‘[The inflation data] will probably lay the groundwork for a reasonably hawkish FOMC meeting this time next week, where despite unchanged rates, the Fed will (through its Dot Plots) hold out the threat of one further hike this year.’
Pound US Dollar Exchange Rate Forecast: US Data in Focus
Looking ahead for the US Dollar, tomorrow brings the release of the latest producer price index data and retail sales figures.
In August, PPI is forecast to have increased by 0.4% on a monthly basis. This could boost the ‘Greenback’ as PPI often filters through to consumer inflation, which would lift rate hike bets.
However, this may be offset by a slowdown in retail sales, which is forecast to have increased by 0.2%, down from 0.7% in July. As a consumption based economy, signs of slowing spending could worry USD investors.
For the Pound, the data calendar grows lighter through to the end of the week. Because of this, Sterling may be left vulnerable to shifts in risk appetite. Bullish trade could lift GBP above the safe-haven US Dollar.