The Pound US Dollar (GBP/USD) exchange rate sank to a three-month low last week, amid some dire UK economic releases.
What’s Been Happing: Pound Crashes as UK Outlook Deteriorates
Despite an upbeat start thanks to risk-on flows, the Pound (GBP) was unable to carry this momentum through the week. On Tuesday, July’s jobs data showed that UK unemployment had risen to a near two-year high.
This weighed heavily on Sterling, despite record-high wage growth. As Investors pared bets on further tightening from the Bank of England (BoE).
Further weakening BoE rate bets and GBP in the middle of the week was a shock 0.5% contraction in UK GDP in July.
While upbeat trade did bring small gains hereafter, the BoE’s next steps remained in focus. The expectation shifted to anticipate a pause after September’s hike, capping Sterling’s gains.
Meanwhile, the US Dollar (USD) seesawed over the week as Federal Reserve hike bets remained in flux.
Wednesday’s inflation data brought turbulence to the ‘Greenback’, as an above-forecast increase in headline inflation prompted a knee-jerk rally. However, core inflation cooled in line with forecasts, prompting a quick reversal as Fed rate bets eased.
However, these expectations were reinstated on Thursday following strong retail sales data and a surprise increase in PPI. This indicated that the Fed may have more to do to tackle inflation, boosting USD.
However, Friday saw USD weaken somewhat following a fall in the Michigan consumer sentiment index, showing growing pessimism.
Three Things to Watch Out for This Week
- BoE Interest Rate Decision
The BoE is expected to push through what might be its final rate hike on Thursday. Could hawkish forward guidance boost GBP?
- UK Inflation
While headline CPI is forecast to increase, core inflation is forecast to cool which may weaken GBP on Wednesday.
- Fed Interest Rate Decision
On Wednesday, the Fed is due to publish it latest interest rate decision. A hold is expected, which could dent USD.
On Friday, private sector indexes are due for the both UK and US. With further contractions expected in the UK readings, GBP may end the week poorly.