Pound US Dollar (GBP/USD) Exchange Rate Fluctuates as US Data Points to Stubbornly High Inflation

April 27, 2023 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Fluctuates as US Data Points to Stubbornly High Inflation

Pound US Dollar (GBP/USD) Exchange Rate Changeable amid Risk-On Mood

The Pound US Dollar (GBP/USD) exchange rate ended Thursday close to its starting position after some volatile movements. The pairing was bolstered at the beginning of the day by a risk-on market mood.

The exchange rate shed its gains later in the day however, after US inflation data pointed to persistent inflationary pressures.

At the time of writing the GBP/USD exchange rate was at around $1.2483, virtually unchanged from that morning’s opening figures.

US Dollar (USD) Bolstered by Signs of Sticky Core Inflation

The US Dollar (USD) recovered lost ground on Thursday. Evidence of underlying inflationary pressure and a still-tight labour market pushed USD higher.

The safe-haven ‘Greenback’ initially came under pressure on Thursday amid a return of global risk appetite. Markets also continued to coalesce around a rate cut from the Federal Reserve later this year.

The release of first quarter GDP growth data later in the day prompted a mixed response in the US Dollar.

On the one hand, first quarter growth cooled to 1.1% versus the expected 2% expansion. The slowdown added to fears of a recession in the world’s largest economy.

James Knightley, Chief International Economist at ING, had the following forecast for US growth:

‘Looking to second quarter GDP growth, we have to expect a reversal in consumer spending given recent retail sales trends, while the softening in non-defence capital goods orders ex aircraft suggests business investment will remain subdued.’

On the other hand, evidence of persistently high inflation prompted a resurgence in USD. The GDP price index printed at an above-forecast 4%, whilst PCE Prices and Core PCE Prices both rose in the first quarter of 2023. The data also inspired fresh bets on additional Fed rate hikes.

A drop in the latest jobless claims added to USD’s gains amid evidence of a tight US labour market. Claims for the week ending April 22 fell to 230,000.

Pound’s (GBP) Losses Cushioned by BoE Rate Hike Bets

The Pound (GBP) trended lower over the course of Thursday. Thin trading conditions left Sterling vulnerable to external drivers.

The promise of further industrial action in the UK weighed on GBP. Train drivers union Aslef announced three strike dates across May and June.

The prospect of additional interest rate hikes from the Bank of England cushioned Sterling’s losses, however. The markets have seen growing acceptance that the central bank will hike rates by 25bps in May.

Speaking on the BoE’s expected actions, ING’s Developed Markets Economist James Smith said:

‘Recent wage and CPI data both came in above expectations and suggest another increase should be the base case for May. That said, policymakers have been explicit that much of the impact of past hikes is still to feed through, so we think the bar to further tightening beyond May remains high.’

GBP/USD Exchange Rate Forecast: Will Core PCE Price Index Reading Boost USD?

The US Dollar could see a boost following the latest reading of the core PCE price index on Friday. The Fed’s preferred measure of inflation is expected to remain unchanged at 0.3%. Evidence of stubbornly high core inflation could also inspire fresh Fed rate hike bets after disappointing data earlier this week.

On the other hand, the headline PCE reading is expected to ease to 4.5%. The figures could dampen any prospective Fed bets.

Additionally, USD could come under further pressure amid fears of US debt default. US House Speaker Kevin McCarthy and President Joe Biden remain at loggerheads over the issues.

With no other data for the Pound this week, the currency may be left vulnerable to any significant shifts in market mood. The prospect of further industrial action may continue to weigh on GBP.

BoE rate hike bets may push Sterling higher this week. Markets are continuing to price in a 25bps hike from the central bank at its May meeting.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Dollar Forecasts