Pound US Dollar (GBP/USD) Exchange Rate Extends Downside following Weak British GDP
(Updated 15:45, 13/12/23) The Pound US Dollar (GBP/USD) exchange rate continued to fall today after this morning’s worrying UK GDP data.
The latest figures from the Office for National Statistics (ONS) revealed an unexpected contraction in the UK economy in October, with GDP printing at -0.3%. Forecasters had expected the economy to stall at 0%.
This GDP miss raises the spectre of a UK recession as the Bank of England’s (BoE) aggressive interest rate hiking cycle bears down on the British economy.
In addition, today’s data has led some analysts to believe that the BoE may end up cutting interest rates even earlier than expected next year, piling further pressure on the Pound (GBP).
The GBP/USD exchange rate has been weakening today as a result, with the pairing touching $1.2505 – almost hitting its lowest level since 23 November.
Meanwhile, the US Dollar’s (USD) upside against the Pound seems limited as USD is struggling to make similar gains elsewhere following a cooldown in US producer price inflation. PPI eased more than forecast last month, which has dampened expectations ahead of the Federal Reserve’s interest rate decision this evening.
At the time of writing, GBP/USD is trading at $1.2526, down around 0.3% on the day.
Looking forward, we could see notable volatility due to the Fed decision tonight and the BoE decision tomorrow.
Both central banks are expected to push back on rate cut speculation, which means we could see GBP/USD see-saw as markets respond to the announcements.
Original article continues below:
Pound US Dollar (GBP/USD) Exchange Rate Weakens as UK Economy Shrinks
The Pound US Dollar (GBP/USD) exchange rate fell sharply this morning following a shock contraction in UK GDP.
At the time of writing the GBP/USD exchange rate is trading at $1.2523, down 0.3% on the day.
Pound (GBP) Falls following Downbeat GDP
The Pound (GBP) dropped this morning after the UK’s latest GDP figures reported an unexpected contraction in October.
According to the latest data from the Office for National Statistics (ONS), the British economy shrank 0.3% in October, rather than flatlining as many had forecast.
GDP was flat (0.0% growth) in the three months to October.
In the month of October, GDP fell 0.3%.
➡️ https://t.co/k1USftqo5r pic.twitter.com/OUdm9sRpaO
— Office for National Statistics (ONS) (@ONS) December 13, 2023
The downbeat data points to a troubling start to the fourth quarter, once again stoking concerns about the UK’s economic health.
The latest data also raises questions around the Bank of England’s (BoE) policy plans as markets try to gauge when the central bank will begin cutting interest rates.
The BoE is likely to leave rates unchanged tomorrow, but after today’s GDP data it may strike a more dovish tone when discussing its policy outlook. This is adding to the pressure on the Pound today.
US Dollar (USD) Muted Ahead of Fed Decision
Meanwhile, the US Dollar (USD) is fairly quiet this morning as USD investors are reluctant to reposition ahead of the Federal Reserve interest rate decision this evening.
Markets are hoping that the Fed will drop some hints about when it expects to cut interest rates next year, with the US central bank’s communication potentially having big implications for the American currency.
As a result, investors are holding fire this morning, which is limiting the US Dollar’s movements.
In addition, a risk-on market mood seems to be stifling the safe-haven ‘Greenback’, capping its upside potential. However, some tailwinds following yesterday’s sticky inflation figures continue to provide USD with support.
GBP/USD Exchange Rate Forecast: Central Bank Decisions to Drive Volatility
Looking ahead, the Fed decision this evening is in the spotlight. With the US central bank set to leave interest rates on hold, markets will be focusing on the Fed’s forward guidance.
If policymakers seek to push back on rate cut speculation then we could see the US Dollar surge higher. On the other hand, a more cautious tone is likely to undermine USD. Either way, we may see volatility this evening.
The Bank of England will then announce its own policy decision tomorrow. Until today’s GDP data, it seemed likely that the BoE could strike a rather hawkish tone. Rate-setters have repeatedly said that market expectations for rate cuts were too optimistic.
However, with the UK economy on shaky ground at the start of the fourth quarter, there’s a chance the BoE may take a more dovish stance. If so, Sterling could face fresh selling pressure.