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Pound US Dollar Exchange Rate Soars after Above-Forecast UK Employment Figures

May 17, 2022 - Written by John Cameron

Pound US Dollar (GBP/USD) Exchange Rate Shoots Upward amid USD Profit-Taking

The Pound US Dollar (GBP/USD) exchange rate is skyrocketing and close to hitting two-week highs today. Better-than-expected UK employment figures are likely helping to push the currency pair higher today, as well as a recovery in global risk appetite. US Dollar (USD) profit-taking may also be boosting GBP/USD. A boost to US retail sales and Brexit concerns could act as headwinds for the pair however.

At time of writing the GBP/USD exchange rate is at around $1.2479, which is up around 1.24% from this morning’s opening figures.

Pound (GBP) Makes Major Gains despite NI Protocol Tensions

The Pound (GBP) is climbing against many of its competitors today. Above-forecast employment figures today have helped to lift Sterling today. Additionally, a recovery to global risk appetite is also benefitting GBP. On the other hand, fears that the UK could initiate a trade war with the EU over the Northern Ireland Protocol could be weighing on the currency.

UK employment hit a 48-year low in figures released today as annual pay including bonuses rose by 7% in March. The figures have continued to support the Pound as markets price in higher chances of further interest rate hikes from the Bank of England (BoE).

Philip Shaw, economist at Investec, said:

‘We were taken aback by the strength of today's labour market release, especially bearing in mind the fears of a downturn in the economy. Indeed it will do nothing to quell the MPC's concerns over inflationary pressures.’

BoE officials were quick to temper optimism however, with real wage growth still significantly behind inflation. A chronic shortage of workers also indicated a continually tight labour market.

The drop in wage growth has added pressure on the UK government to act in the face of the UK’s cost-of-living crisis.

Fresh Brexit-related headwinds could also be preventing GBP from climbing any higher today. UK Foreign Secretary Liz Truss today confirmed plans that the government would be tabling legislation that would scrap parts of the NI Protocol. The move has come under widespread criticism from both UK MPs and EU diplomats.

US Dollar (USD) Slips amid Risk-On Market Mood

The US Dollar (USD) has tumbled against its rivals today amid a risk-on market mood. Traders may also be limiting bets ahead of a speech from Federal Reserve Chair Jerome Powell later today.

The drop to USD comes despite a 0.9% jump to US retail sales in April. The figures have helped limit fears of a US recession as consumer spending remains strong. The rise was fuelled by increased sales of cars and electronics, with healthy savings levels and wage increases helping bolster consumers’ finances.

Speaking on the figures, Paul Ashworth of Capital Economics said:

‘Given this show of strength from consumers, speculation that the US economy is in danger of an imminent plunge into recession look badly misplaced. Together with the surprising strength of core CPI last month, this is another reason to expect the Fed to continue hiking rates by 50bp per meeting, despite the recent swoon in stock markets.’

These expectations of further rate hikes from the Fed may be underpinning the US Dollar today. Speaking on Monday, Fed policymaker Loretta Mester stated that a 0.75% rate hike was still ‘on the table’.

GBP/USD Exchange Rate: Will UK Interest Rates Hit Fresh Highs?

Looking to the week ahead for the Pound (GBP), a forecast rise to UK inflation on Wednesday could increase speculation regarding a BoE rate hike and boost Sterling. Additionally, a predicted recovery in the UK’s retail sector on Friday could also help lift GBP.

For the US Dollar (USD), a speech from Fed Chair Jerome Powell later today could prompt movement in the currency if investors pick up on any hawkish signals.

On the other hand, a drop to initial jobless claims could limit gains for USD.

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