Pound US Dollar (GBP/USD) Exchange Rate Drops on Sterling Weakness
The Pound US Dollar (GBP/USD) exchange rate fell last week to an 8-day low, as Pound (GBP) headwinds prevailed while the US Dollar (USD) benefitted from a risk-off mood.
At the time of writing, GBP/USD is trading at $1.2226, approximately 1.25% lower on the week.
Pound (GBP) Dented by Weak Data, Risk Aversion
The Pound struggled to climb against several of its peers last week, as a combination of weak UK housing data, a risk-off mood and dovish rhetoric from the Bank of England (BoE) weighed upon the currency.
At the start of the week, the BoE’s chief economist Huw Pill indicated that the central bank may consider cutting interest rates next year, cognisant of the effect of restrictive monetary policy on the economy. His dovish tone depressed GBP sentiment.
The following day, Sterling remained pressured by UK housing forecasts. The EY ITEM Club forecast the lowest mortgage loan uptake in a decade, with spokesperson Anna Anthony saying:
‘Significant cost-of-living pressures continue to affect households’ ability to spend, and an increasing number are finding it difficult to keep up with loan repayments.’
Midweek, GBP/USD traded largely sideways, while further comments from Huw Pill on Thursday inspired a mixed response. The central bank’s commitment to a ‘higher for longer’ monetary policy narrative drew some support, yet Pill’s resistance to another interest rate hike capped gains.
At the end of the week, the UK’s latest GDP data kept Pound exchange rates subdued. The British economy didn’t contract as forecast, but stagnated in Q3, marking the weakest performance in four quarters.
US Dollar (USD) Trends Broadly Higher on Safe-Haven Support
The US Dollar rose last week against a majority of other currencies despite a lack of notable US data.
A narrowing of China’s trade surplus early in the week triggered cautious trade, which attracted safe-haven tailwinds to the ‘Greenback’ – although dovish rhetoric from the Federal Reserve limited USD gains.
Chicago Fed President Austan Goolsbee remarked on Tuesday: ‘As long as we’re making progress [in bringing inflation down], as I’ve been saying for a while, the moment of arguing how high the rate should go is going to fade.’
Midweek, Fed chairman Jerome Powell’s scheduled speech was uneventful, leading the US Dollar to trend sideways against GBP; but bearish market sentiment prevented losses. Even on Thursday, as weaker than expected employment data was released, USD/GBP managed to climb.
Comments from Chairman Powell in the European evening boosted the ‘Greenback’ as they intimated a preference for tighter monetary policy. The central bank chief said policy may not yet be sufficiently restrictive to reduce and sustain inflation at a target rate of 2%.
USD/GBP extended its gains on Friday despite a weaker-than-expected consumer sentiment reading, as Sterling weakness buoyed the exchange rate higher.
GBP/USD Exchange Rate Forecast: Inflation in the Spotlight?
Looking ahead, UK and US core inflation data is likely to drive movement in the Pound US Dollar exchange rate over the coming week.
The US reading on Tuesday is forecast to print at 4.1%; given Powell’s recent commentary, sticky inflation may boost Fed rate hike bets. Meanwhile in the UK, core inflation is expected to cool from 6.1% to 5.8%; possibly paring BoE rate hike bets given the central bank’s recent dovish tone.
The UK’s latest jobs data will print on Tuesday and is expected to reveal that unemployment rose in October, approaching a two-year-high; yet UK average earnings (including bonuses) are forecast to have increased.
While signs of a loosening employment sector may exacerbate concerns of an economic slowdown, robust wage growth could indicate strength in the labour market. Mixed data is likely to limit GBP gains, instead inspiring uncertainty.
A contraction in US retail sales could depress the US Dollar midweek, while conversely, an uptick in UK sales on Friday might buoy the Pound if investors subsequently consider a recession less likely. Meanwhile, ongoing geopolitical tensions are likely to dampen risk appetite – which could equate to increased support for the safe-haven ‘Greenback’.