Pound US Dollar (GBP/USD) Exchange Rate Slinks Lower as US GDP Rises

Pound US Dollar (GBP/USD) Exchange Rate Tumbled Last Week amid USD Tailwinds

The Pound US Dollar (GBP/USD) exchange rate trended broadly lower last week as the US Dollar (USD) was buoyed by a better-than-expected GDP result. Meanwhile, the Pound (GBP) faced headwinds in the way of disappointing PMI data.

At the time of writing, GBP/USD is trading at $1.2121, a quarter of a percentage point below this time last week.

Pound (GBP) Pressured amid Signs of Weakness

The Pound weakened against the ‘Greenback’ last week, though traded in a mixed range against its peers overall. Indications of central bank policy divergence rattled GBP investors, capping gains for the currency.

A lack of significant UK data at the start of the week left the Pound subdued. On Tuesday, Sterling firmed however, boosted initially by the fact that UK unemployment steadied rather than increasing; although gains were subsequently relinquished. Investors latched onto data showing that the number of employed people fell by 82,000 and were further depressed by disappointing PMI data.

Midweek, GBP/USD tumbled further as a risk-off mood dominated. Indications that UK inflation may be on the way down prompted hopes of an economic recovery but diminished the likelihood of a hawkish Bank of England (BoE).

The Pound made a meagre recovery against USD at the start of Thursday’s session, but soon lost momentum. Disappointing retail data from the Confederation of British Industry (CBI) disappointed traders; moreover, the likelihood of monetary policy divergence weighed upon GBP morale.

Friday then saw little change in the exchange rate as investors resigned themselves to the prospect of an upcoming interest rate hold. Endorsing this view, Francesco Pesole, FX Strategist at ING, observed:

‘With less than a week to go to the Bank of England meeting and the MPC members in the black-out period, markets have cemented their view there will be no change at any of the upcoming policy meetings.’

US Dollar (USD) Emboldened by GDP Surge

The US Dollar (USD) faced intermittent headwinds last week yet firmed overall against the Pound and several other peers.

At the start of the week, markets were hesitant to bet on an upcoming interest rate raise from the Federal Reserve. Their reluctance was informed by past comments from policymakers, implying that market turbulence – including a rapid escalation in bond yields – may do the work of tightening monetary policy conditions.

On Tuesday, October’s preliminary PMIs came in strong – in contrast with UK data. This boosted the US Dollar, as a persistent risk-off mood continued to support the safe-haven currency. Midweek, USD/GBP peaked before easing sideways ahead of a speech from Fed Chairman Jerome Powell.

Thursday’s GDP data jumped from 2.1% in the second quarter to 4.9% for Q3, indicating a strong US economy: yet an ambiguous speech from Powell the night before and fresh risk-on sentiment capped USD gains.

The US Dollar continued to waver in a narrow range against GBP on Friday, as the year-on-year core PCE price index for September – the Fed’s preferred measure of inflation – failed to advance upon August’s reading.

Slowing price pressured limit the chances of monetary policy tightening, as markets are aware – even an unexpected increase in the finalised Michigan consumer sentiment index failed to boost USD.

GBP/USD Exchange Rate Forecast: Central Bank Decisions in Focus

Into this week, the Pound US Dollar exchange rate is likely to be affected by markets’ expectations for the upcoming central bank decisions. In the interim, investors will be on the lookout for clues as to likely forward guidance.

Possibly directing movement at the start of the week, the Bank of England’s consumer credit release is expected to indicate a slowing of consumer borrowing. If the data prints as expected, Sterling may benefit from hopes of a recovery in economic activity.

On Tuesday, an uptick in manufacturing according to the Dallas Fed’s index could alternately support the Dollar, although USD could be dented by forecasts of a continued contraction in US factory activity midweek. The ISM services PMI is due on Friday.

Olivia Evershed

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