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Pound US Dollar (GBP/USD) Exchange Rate Tumbles on Rise in US Retail Sales Growth

May 15, 2018 - Written by John Cameron

UK Unemployment Holds Strong – Pound (GBP) Exchange Rates Fail to Capitalise

The Pound US Dollar (GBP/USD) exchange rate fell on Tuesday, failing to capitalise on a run of upbeat UK labour market releases and limited by a rise in US retail sales growth.

According to the Office for National Statistics (ONS) unemployment in the UK dropped by 46,000 in March, holding the percentage figure at the 42-year low of 4.2%.

Senior ONS Statistician Matt Hughes shared his thoughts on the results:

‘With employment up again in the three months to March, the rate has hit a new record, with unemployment remaining at its lowest rate since 1975. The growth in employment is still driven by UK nationals, with a slight drop over the past year in the number of foreign workers. It’s important to remember, though, that this isn’t a measure of migration’.

In other news wage growth in the UK rose at an annual rate of 2.9% in the three months to March, smashing the rate of consumer price inflation for the first time in over a year.

This means that the year-long pay squeeze has officially come to an end – great news for the British economy that should also help push the Bank of England (BoE) towards hawkish policy movements in the coming months.

Ultimately, however, this news was not enough to prevent GBP/USD from falling, with investors largely favouring the ‘Buck’ out of optimism for a rate hike as soon as June.

US Retail Sales Growth Accelerates – US Dollar (USD) Exchange Rates Climb

The ‘Greenback’ (USD) extended its rally on Tuesday, bolstered by a monthly rise in US retail sales in April.

According to the US Commerce Department, headline sales increased by 0.3% last month, consistent with analyst expectations but below the upwardly revised 0.8% recorded in March.

This result was largely driven by a stronger car sales and higher gasoline prices, a result that reassured traders that the weakness at the start of the year might have simply been a small blip.

This news added further momentum to the US Dollar, particularly with investors now pricing in a further three US Fed rate rises in 2018.

Pound US Dollar (GBP/USD) Exchange Rate Forecast: US Fed Expectations at the Forefront

The outlook for the Pound US Dollar (GBP/USD) exchange rate worsened this week as investors responded to news that Cleveland Fed President Loretta Mester pointed to the Fed funds rate rising above 3% in 2020.

Speaking in Paris, France, Mester asserted that the Federal Reserve might have to raise interest rates at an accelerated pace in order to meet their twin goals of stable inflation and low unemployment.

She stated:

‘As the expansion continues, it could be that in order to maintain our policy goals, we may need to move the fed funds rate, for a time, a bit above the level of the funds rate that is expected to prevail over the longer run’.

The Cleveland Fed President (generally seen as a hawkish Fed Official) also asserted that she does not see inflation rising sharply, however - thus its current path of rate hikes seems likely.
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