Pound US Dollar (GBP/USD) exchange rate climbs as key release awaited
The Pound US Dollar (GBP/USD) exchange rate has found support this morning as markets ruminate over the possibilities of this afternoon’s US PCE release. As US Dollar (USD) traders are preoccupied, Pound (GBP) investors are optimistic following hawkish comments from the Bank of England’s (BoE) Catherine Mann.
At the time of writing, GBP/USD is trading at $1.2664 – approximately 0.3% above opening levels.
US Dollar (USD) tumbles following weaker-than-expected GDP data
The US Dollar remains subdued this morning following yesterday’s weaker-than-forecast GDP release, which revealed that the US economy grew by slightly less than expected in the final quarter of 2023.
The GDP second estimate printed at 3.2% for Q4, rather than 3.3% as predicted, with the US Bureau of Economic Analysis (BEA) observing:
‘The update primarily reflected a downward revision to private inventory investment that was partly offset by upward revisions to state and local government spending and consumer spending.’
Nevertheless, a risk-off mood and hopes for a hawkish Federal Reserve are capping ‘Greenback’ losses. This afternoon’s PCE release – the central bank’s preferred measure of inflation – is expected to print at 0.4% compared with last month’s 0.2%, complicating the disinflation narrative.
If the data comes in as expected, the Fed are likely to strike a bold tone, aligning with other major central banks in favouring a ‘higher for longer’ interest rate stance. Comments such as those given by New York Fed President John Williams yesterday supports such a forecast.
While Williams avoided giving any certain indication of the central bank’s outlook, saying he will be focused on the data, the economic outlook, and the risks, he did push back against suggestions of imminent interest rate cuts.
‘While the economy has come a long way toward achieving better balance and reaching our 2% inflation goal, we are not there yet,’ the Fed official remarked, adding, ‘I am committed to fully restoring price stability in the context of a strong economy and labour market.’
Pound (GBP) buoyed by BoE rhetoric
The Pound snapped a six-day winning streak against the US Dollar yesterday, yet resumes its uptrend this morning as hawkish comments from BoE policymakers quash concerns over monetary policy divergence between the Bank of England and the Fed.
Yesterday, known BoE hawk Catherine Mann gave a persuasive speech in which she reiterated that inflation in the UK remains too high to begin lowering interest rates. Mann told the Financial Times that the spending habits of wealthier consumers immune to the pressure of high interest rates is preventing inflation from easing more rapidly:
‘Consumers discipline what firms can price – they can’t pay for it … or they choose not to,’ said Mann; ‘There is not a lot of consumer discipline on a large enough fraction of categories of services to represent active deceleration in services price inflation.’
Her speech echoed comments made likewise by the Bank of England’s deputy governor, Dave Ramsden. Ramsden concurred that inflation remains too high and said he’d like to see more evidence that price pressures are easing voting for an interest rate cut.
Elsewhere, the UK’s latest consumer credit report has revealed that borrowing increased in January beyond expectations. This correlates with reports that spending has increased, indicating that individuals are loaning money to fund purchases as the cost of living continues to weigh upon household finances.
According to the data, the consumer credit increase was largely driven by higher borrowing through credit cards, which rose from £0.3 billion in December to £0.9 billion in January.
GBP/USD forecast: exchange rate to trade on PCE release
The Pound US Dollar exchange rate is likely to trade this afternoon upon the latest inflation data from the US. As outlined above, an increase in the core PCE price index is likely to inspire hawkish comments from the Fed.
Indeed, two Federal Reserve officials are due to speak after the release: Raphael Bostic and Austan Goolsbee. The Fed Presidents of Atlanta and Chicago (respectively) will no doubt comment upon the data, possibly indicating the implications for central bank policy.
A lack of further UK data, meanwhile, leaves Sterling to trade upon risk sentiment and other external factors. Rumours of a possible ceasefire agreement between Israel and Hamas over the weekend may have triggered some bullish tailwinds, but these are likely to fade as the parties involved impart that there remain many points of disagreement.