GBPUSD Rangebound Amid Upbeat UK Forecasts
The Pound US Dollar (GBPUSD) exchange rate remains rangebound as of today, with the possibility of a 25bps rate hike from the Federal Reserve in May potentially affecting the pairing. Additionally, elevated US Treasury bond yields may be contributing to the exchange rate’s downtrend. However, despite these factors, GBP/USD is being supported by positive forecasts for the UK economy, including an EY ITEM club prediction that the economy will expand by 0.2% in 2023.
Amid upbeats about the UK economy, the Pound US Dollar (GBPUSD) exchange rate could potentially surge higher, with investors optimistic about the country's economic recovery from the pandemic.
Could Evidence of Easing Inflation Pull Pound (GBP) Lower?
The coming week could bring challenges for the Pound (GBP) if crucial data releases indicate cooling inflation. Tuesday's employment data, which is forecast to show a drop in February's wage growth to 5.1%, could mark the beginning of Sterling's downturn. The Bank of England (BoE) has cited a potential wage-price spiral as a reason for further interest rate hikes. The currency may face deeper losses on Wednesday if March's inflation cools as expected, with headline inflation expected to fall to 9.8%. This could lead to a decrease in bets on a 25bps rate hike from the BoE at their May meeting.
A Possible Fall in March’s Retail Sales Could Weaken Sterling Further
Sterling may lose further ground if there is a fall in March’s retail sales on Friday. After a surprising jump in February, sales are predicted to drop by 0.5%. The outlook for the UK economy may depend heavily on consumer spending, which accounts for a significant portion of the country’s GDP. If the figures do not meet expectations, this could push the currency down even further.
Will Fed Bets Continue to Sustain US Dollar (USD)?
The US Dollar (USD) may see movement this week due to shifting expectations of a Fed rate hike. A speech from policymaker Michelle Bowman on Tuesday could prompt shifts in USD if markets pick up on any definitive hints. On Thursday, a forecast uptick in initial jobless claims could drag the US Dollar lower if claims print as expected. Claims have remained higher over recent weeks, indicating slack in the US labour market. April’s PMI data, released on Friday, could have a mixed effect on the USD. The US services sector is expected to remain in positive territory, but services sector output is set to slip slightly from its March position. Additionally, the US manufacturing sector is set to fall further into contraction, which could dent confidence in the USD.
The Impact of Inflation on Forex Markets
Inflation is a crucial factor in forex trading, as it can significantly impact exchange rates. The potential for cooling inflation in the UK may weaken the Pound (GBP) against the US Dollar (USD), as markets may pare back bets on a rate hike from the Bank of England (BoE). On the other hand, if US inflation continues to rise, this could support the USD and drive the GBP/USD exchange rate lower. Forex traders need to keep a close eye on inflation data and other economic indicators to make informed decisions about their trades.