GBP Rallies On Weak US Data
However, after climbing to multi-month highs, the rug was quickly pulled out from beneath the ‘Greenback’ with the release of the latest US PMIs, which reported the US manufacturing sector slipped into contraction in April.
Stronger-than-expected durable goods orders and a rise in US Treasury yields then offered fleeting support to USD in mid-week trade
Further volatility was seen in the wake of the latest US GDP figures. The preliminary estimate for the first quarter reported US economic growth slowed from 3.4% to 1.6%.
The initial response saw USD exchange rates firm as the weaker growth spooked investors, before the US Dollar quickly fell back.
The publication of the latest core PCE price index then provided a boost for the ‘Greenback’ at the end of the week, after the Fed’s preferred indicator for inflation printed above expectations in March.
Pound (GBP) Rebound as Investors Trim BoE Rate Cut Bets
The Pound (GBP) initially stumbled last week, with GBP/USD sinking to a new five-month low amid speculation the Bank of England’s (BoE) could start its cutting cycle with a 50bps interest rate cut in August
Sterling sentiment quickly recovered, following the publication of the UK’s latest PMIs, as the services index smashed expectations and signalled that the UK’s rebound from recession continues to gather pace.
The PMI also highlighted how price pressures in the private sector continued to mount this month.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: ‘The upturn encouraged firms to take on workers in increased numbers which, alongside April’s rise in the National Living Wage, drove cost pressures sharply higher.
‘While the improving economic recovery picture is welcome news, the upward pressure on inflation will add to concerns that a sustainable path to below target inflation has not yet been achieved.’
Reinforcing the Pound’s recovery in the first half of the week were comments from BoE Chief Economist Huw Pill, who suggested the ‘time for cutting bank rate remains some way off’.
A further trimming of BoE rate cut bets then lent support to Sterling through the latter half of the week and allowed the currency to shrug off some mixed data from the Confederation of British Industry.
GBP/USD Exchange Rate Forecast: Fed and BoE Interest Rate Decisions in the Spotlight
Looking to the week ahead, the latest interest rate decisions by the Fed and BoE are likely to act as the main catalyst of movement in the Pound US Dollar exchange rate.
The Fed is up first and will deliver its rate decision on Wednesday evening. No policy changes are expected from the bank following its May meeting, but in light of recent US inflation and payroll figures, Fed officials are expected to adopt a more hawkish outlook on policy.
Could this reinforce bets that multiple rate cuts from the Fed this year are now unlikely and propel the US Dollar higher?
Likewise, the BoE is also expected to leave its monetary policy when it concludes its latest meeting on Thursday.
As a result, the focus for GBP investors will be on the bank’s forward guidance. If the BoE hints that it is nearing the start of its cutting cycle then expect to see the Pound slump.
On the other hand, if the BoE signals that markets are too aggressive in pricing in rate cuts, Sterling could rally.
The end of the week will then see the publication of the latest US non-farm payroll report. Will a slowdown in employment growth drag on the US Dollar, or could another bumper payroll report see the ‘Greenback’ test new highs?
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