Pound US Dollar (GBP/USD) Exchange Rate Weakens on Sterling Headwinds
The Pound US Dollar (GBP/USD) exchange rate trended lower over the course of the week as a series of weak UK data weighed upon the Pound (GBP). Meanwhile, the US Dollar (USD) faced headwinds of its own as US core inflation showed signs of slowing.
At the time of writing, GBP/USD is trading at $1.2381, having fallen by over 0.7% last week.
Pound (GBP) Battered by GDP, Employment Data
The Pound dropped in the majority of exchange rates last week as UK data disappointed. Employment fell by more than expected on Tuesday; subsequently, the British economy was shown to have contracted by more than double the amount forecast.
At the start of the week, Sterling climbed against the ‘Greenback’ as a risk-on mood boosted the currency; a speech from the Bank of England (BoE)’s Chief Economist Huw Pill had little impact, leaving GBP trending sideways against its other peers.
On Tuesday, a hawkish speech from policymaker Catherine Mann complicated interest rate expectations – while several monetary policy committee members cautioned that further rate hikes could trigger a recession, Mann argued she would ‘rather err on the side of over-tightening’.
Furthermore, a fall in employment of 207 thousand jobs highlighted the pressure the UK economy is already facing: the data marked the biggest employment fall outside of a recession this summer.
Midweek, UK GDP was revealed to have contracted by 0.5% in July 2023 – 0.3% lower than forecasts. The news weighed upon Sterling exchange rates, encouraging a bearish turn in interest rate expectations.
Headwinds extended into Thursday’s session and on Friday, GBP/USD hit a weekly low. While upbeat data from China inspired risk-on tailwinds, GBP gains were capped by ongoing recession fears as well as news that train drivers would be striking again at the end of the month.
US Dollar (USD) Gains despite Mixed Inflation Data
The US Dollar (USD) wavered against the Pound at the start of the week as strong risk appetite sapped support for the safe-haven currency. Capping losses, however, were hopes that the Federal Reserve may achieve a soft landing given the previous week’s impressive data.
USD/GBP then climbed on Tuesday as waning risk sentiment drew support to the ‘Greenback’. Nevertheless, investors erred on the side of caution ahead of Wednesday’s inflation release.
The latest CPI data prompted an initial rally in the US Dollar midweek, as headline inflation was shown to have increased – triggering hopes of a hawkish Fed. Gains were then retracted, however, as attention shifted to a cooldown in core inflation, which fell to 4.3% from a previous 4.7%.
Following choppy trade on Wednesday, the ‘Greenback’ recovered losses on Thursday as producer prices increased by more than expected. Retail sales also exceeded forecasts, printing at 0.6%.
David Silverman, senior director at Fitch Ratings, said that his company: ‘continues to view the consumer as relatively healthy, supported by low unemployment and somewhat declining goods inflation.’
At the end of the week, USD weakened briefly before rebounding to hit a 3-month high against the Pound. While the latest Michigan consumer sentiment index came in below forecasts, the ‘Greenback’ was buoyed by lingering tailwinds following Thursday’s data.
GBP/USD Exchange Rate Forecast: Central Bank Decisions to Direct Trade
Looking ahead, interest rate decisions from both the Federal Reserve and the Bank of England will be in focus. While the Fed is widely expected to keep interest rates on hold, the BoE is forecast to enact a 25bps hike.
Neither outcome is certain – Huw Pill’s dovish rhetoric in the last fortnight has served to limit bullish hopes from GBP investors while higher-than-expected headline inflation from the US allowed ‘Greenback’ traders to hope for hawkish movements from the Fed.
PMI data at the end of the week may further alter the trajectory of the GBP/USD exchange rate. Both economies are set to suffer setbacks; although an improvement in UK retail sales may help cap GBP losses.