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Pound US Dollar Exchange Rate News: GBP/USD Subdued as UK GDP Growth Slows

December 10, 2021 - Written by John Cameron

GBP/USD Muted amid Disappointing GDP Figures

The Pound to US Dollar (GBP/USD) exchange rate has fallen in response to UK’s disappointing GDP growth in October.

At the time of writing, the GBP/USD exchange rate is trading at approximately $1.3201 with minimal market movement.

Pound (GBP) Undermined by Slowing Growth

The Pound (GBP) began today’s session on the defensive against the US Dollar (USD) due to the UK GDP data revealing that growth slowed during October.

October’s UK GDP reported domestic growth slowed to just 0.1%, down from 0.6% in September and missing forecasts for a 0.4% expansion.

The most substantial contribution came from face-to-face services, such as GP appointments, although activity here still remains below pre-pandemic levels.

Kitty Ussher, chief economist at the Institute of Directors, said:

‘Economic growth would have fallen in October if it were not for the return of face-to-face appointments in the NHS and the ramping up of vaccination activity, both of which had a noticeable positive impact on the service sector.
‘Meanwhile consumers, who had enjoyed the opening of hospitality venues in the late summer, in October switched back to shopping – and booking holidays.’

Maike Currie, investment director at Fidelity International, said:

‘At 0.5% below its pre-pandemic level, October might be the closest the economy gets to reaching ‘normal levels’ until deep into 2022.

‘As we edge towards 2022, growth forecasts have been downgraded for the year ahead with GDP expected to reach just 4.2%.’

The economy is likely to be further hampered by the recent restrictions reinstated by the UK government due to the rising cases of Omicron.

However, Rishi Sunak, the Chancellor of the Exchequer, argues that the disappointing data is simply a ‘bump in the road’ and believes that the Plan B implemented for the rising Omicron cases, will keep the economy on target.

US Dollar (USD) Edges Higher ahead of US Inflation Release

At the same time, the US Dollar (USD) is trending higher against the majority of its peers this morning as a risk-off sentiment prevails and USD investors await the latest US consumer price index.

Today’s CPI release is forecast to show domestic inflation accelerated to 6.8% in November which, if correct, would be the highest percentage since 1982 and would also be the 8th consecutive month of inflation exceeding the Federal Reserve’s target of 2%.

Excluding food and energy, inflation is forecast to accelerate from 4.6% to 4.9% which, if correct would be the highest percentage since 1991.

The high inflation reading is likely to reduce Fed interest rates hike bets, dampening the USD’s appeal.

US President Joe Biden, said:

‘The information being released […] on energy in November does not reflect today's reality, and it does not reflect the expected price decreases in the weeks and months ahead, such as in the auto market.’

Biden has reiterated the ‘Build Back Better’ plan on social spending will aid costs to be lowered.

Brian Deese, US President’s economic advisor, said:

‘That data is by definition backward-looking and so it won't capture some recent price movements, particularly in the areas of energy.’

Moreover, the Treasury Bonds have risen this morning which is further supporting the ‘Greenback’.

GBP/USD Exchange Rate Forecast: Will Fed and BoE Decisions Surprise Investors?

Looking ahead, the Pound US Dollar exchange rate is likely to be impacted by the interest rate decisions of both the Federal Reserve and Bank of England (BoE).

The BoE is scheduled to discuss interest rates at the December meeting next week. Rate hike bets have diminished following the activation of Plan B and the bank is now expected to leave interest rate on hold at 0.1%, which is likely hamper GBP’s potential.

However, the UK’s employment figures, due to be revealed next week, may support GBP if unemployment continued to drop in October.

Meanwhile, the Fed will also deliver its latest interest rate decision and is expected to leave things unchanged at 0.25%. However the potential acceleration of the Fed's tapering plan could lend some support to the US Dollar.

Further influence is likely to come from ongoing issues surrounding the Omicron situation.

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