GBP/USD exchange rate dips as sterling recovery falters
The pound US dollar (GBP/USD) exchange rate is trending lower today as economic headwinds in the UK weigh upon the pound (GBP) while US dollar (USD) investors turn their attention to the core PCE inflation data for May.
At the time of writing, GBP/USD is trading at $1.2652, having fallen by more than 0.2% in the past 24 hours.
Pound (GBP) softens as bullish streak fades
The pound is easing lower against several peers today as the UK’s latest distributive trades release disappointed and tensions escalate ahead of the UK’s upcoming general election.
While distributive trades data isn’t generally a high-impact release, the extent of the fall in June’s reading appears to be subduing Sterling traders alongside several other factors. The release printed at –24 rather than the 1 expected, marking a significant drop in sales compared with this time last year.
Alpesh Paleja, interim deputy chief economist at the CBI, commented upon the data:
‘Last month’s nascent recovery in sales proved to be short-lived, with retailers reporting a faster-than-anticipated decline this month. Unseasonably cold weather in June may have played a role, but it’s notable that internet retail sales fell sharply in our survey, too.’
Also denting GBP morale may be economic and political uncertainty given mixed inflationary pressures in the United Kingdom and the prospect of a change in government. Strong domestic wage growth undermines slowing inflation in other areas of the economy, reinforcing the argument that interest rates should be held higher for longer.
The Bank of England (BoE) has maintained a hawkish stance recently, bringing it closer to the policy strategy of the Federal Reserve and inspiring pound tailwinds. However, the UK central bank has minimised public announcements ahead of the UK’s general election, making it hard for investors to assess when the bank might enact its first rate cut.
US dollar (USD) climbs ahead of Friday’s PCE release
The US dollar is firming against the majority of its peers today, buoyed ahead of the release of May’s PCE inflation data on Friday. The release is the Federal Reserve’s preferred measure of inflation and is expected to print at 0.1%.
While higher inflation often boosts the ‘Greenback’ as it suggests that the US central bank will maintain tight monetary policy, the Fed has already adopted a more hawkish stance than several other central banks; rising inflation is unnecessary to convince investors of the Federal Reserve’s position.
Contributing toward the impression that the Fed will keep interest rates on hold in the near term is a speech given by policymaker Michelle Bowman yesterday. Bowman remarked:
‘Inflation in the US remains elevated, and I still see a number of upside inflation risks that affect my outlook. We are still not yet at the point where it is appropriate to raise the policy rate.’
Moreover, a risk-off mood in the currency market is also serving to buoy USD sentiment. Several upcoming political events across the globe represent uncertainty – a condition under which the US dollar thrives.
French elections on Friday are one of several high-stakes events, as well as the UK’s general election and a debate between US President Joe Biden and his predecessor Donald Trump.
GBP/USD exchange rate forecast: US data takes centre stage
Into tomorrow, the pound US dollar exchange rate is likely to trade upon a series of US data releases, given the lack of significant UK data.
The latest durable goods release will be published during the European afternoon, alongside finalised GDP data for the first quarter of 2024. The first release is expected to print at 0% and as such is unlikely to inspire USD tailwinds; if the US economy is confirmed to have grown by 1.3% last quarter, however, USD/GBP could firm.
Meanwhile, Sterling will be left to trade upon external factors such as risk sentiment and political dynamics. A risk-off mood could depress GBP against the ‘Greenback’, although the currency may climb against in other exchange rates.