Pound US Dollar (GBP/USD) Exchange Rate Slashes Gains amid End-of-Quarter Correction
(Updated 16:30, 29/09/23) After hitting a one-week high, the Pound US Dollar (GBP/USD) exchange rate fell sharply this afternoon. The decline came amid market volatility on the last trading day of the third quarter.
The Pound (GBP) had initially marched higher against the US Dollar (USD), extending its recent recovery, following an upward revision to UK GDP growth.
A cheery market mood also supported the currency pair, boosting the riskier Pound against the safe-haven ‘Greenback’. In addition, cool US inflation data dented Federal Reserve interest rate hike bets.
However, Sterling was unable to sustain the upside, as markets adjusted their positions in end-of-quarter trade. The volatility saw GBP/USD drop from a one-week high to end the day’s session virtually unchanged from its opening levels.
Original article continues below:
Pound US Dollar (GBP/USD) Exchange Rate Extends Recovery amid US Inflation Data
(Updated 14:25, 29/09/23) The Pound US Dollar (GBP/USD) exchange rate is holding strong this afternoon after US core inflation cooled.
The core PCE price index – which is the Federal Reserve’s preferred measure of inflation – eased from 4.3% in July to 3.9% in August, its lowest level in two years. On a monthly basis, core inflation only rose 0.1% last month. This indicates that inflationary pressures in the US are abating.
Kathy Jones, Chief Fixed Income Strategist at Charles Schwab, points out that core inflation is heading towards the Federal reserve’s target.
PCE and core pce figures indicate continued inflation easing. The 3-mo rate of change for core pce is now 2.2% – close to the Fed's target. pic.twitter.com/NWkXVXSZno
— Kathy Jones (@KathyJones) September 29, 2023
The cooldown in inflation has slightly dampened bets on more action from the Fed, thereby putting pressure on the US Dollar (USD).
Meanwhile, the Pound (GBP) has been enjoying an upward revision to UK GDP and a risk-on market mood.
At the time of writing, GBP/USD is trading at around $1.2255. This is up more than 0.4% on the day, and just shy of a one-week high hit earlier in the session.
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Pound US Dollar (GBP/USD) Exchange Rate Rises amid Risk-On Mood and UK Optimism
The Pound US Dollar (GBP/USD) exchange rate is ticking higher today as UK GDP and a risk-on mood boost the currency pairing.
At the time of writing, GBP/USD is trading at around $1.2242, up 0.3% on the day.
Pound (GBP) Firms following UK GDP
The Pound (GBP) is enjoying modest support today following the publication of the UK’s final GDP growth rate for the second quarter.
Although the quarter-on-quarter result came in as expected, showing a slight decline from 0.3% in Q1 to 0.2% in Q2, the yearly figure exceeded previous estimates. Year on year, the UK economy expanded 0.6% in the second quarter, revised up from 0.4%.
Commenting on the figures, Chancellor Jeremy Hunt said:
‘We know that the British economy recovered faster from the pandemic than anyone previously thought and data out today once again proves the doubters wrong.
‘We were among the fastest countries in the G7 to recover from the pandemic and since 2020 we have grown faster than France and Germany.’
This slightly more upbeat outlook has lent Sterling some support today.
However, some economists believe that the forecast remains rather bleak. Ruth Gregory, Deputy Chief UK Economist at Capital Economics, explains:
‘The final Q2 2023 GDP data release shows that the economy was a bit more resilient in the first half of this year than we previously thought. But other indicators suggest this is now fading. We still think that higher interest rates will trigger a mild recession involving a 0.5% fall in GDP in the coming quarters.
‘It does not change the big picture that the economy has lagged behind all other G7 countries aside from Germany and France since the pandemic. And that’s before the full drag from higher interest rates has been felt.’
These concerns seem to be keeping a firm lid on the Pound’s gains.
US Dollar (USD) Weakens amid Risk-On Mood
Meanwhile, weakness in the US Dollar (USD) is allowing the GBP/USD exchange rate to strengthen, as the safe-haven ‘Greenback’ struggles amid a risk-on market mood.
Risk appetite has been improving over the past two days, as investors grow hopeful that easing inflation will spur central banks around the world to stop raising interest rates.
Today, the latest inflation data from the US and the Eurozone are both expected to show that price pressures continue to abate. Markets are growing more optimistic in anticipation of these releases, which is denting demand for the ‘Greenback’.
USD investors also seem cautious ahead of the inflation release, as it could spark notable volatility. As such, traders seem unwilling to defend the US Dollar as it cedes ground to the Pound.
GBP/USD Exchange Rate Forecast: US Dollar to Drop following Inflation Data?
Looking ahead, the US core PCE price index is set to be the main event today for GBP/USD.
The Federal Reserve’s preferred measure of inflation is expected to ease from 4.2% to 3.9%. Signs that underlying inflation continues to cool could dent bets on another Fed interest rate hike, which could put pressure on the US Dollar.
Until then, Sterling could hold on to its gains if the risk-on market mood remains.