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Pound US Dollar (GBP/USD) Exchange Rate Jerks Up on Moderate Risk Appetite

August 8, 2022 - Written by John Cameron

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GBP/USD Exchange Rate Eases Higher despite GDP Forecasts



The Pound US Dollar (GBP/USD) exchange rate is trending gradually higher this morning despite UK headwinds in the form of bleak GDP forecasts. Meanwhile, the US Dollar is consolidating Friday’s gains, although gains are capped by a mild risk-on mood.

At the time of writing, GBP/USD is trading at $1.2092, up 0.2% from today’s opening levels.


Pound (GBP) Trades Mixed as Risk-On Mood Caps Losses



The Pound (GBP) is trending broadly higher against its peers today as moderate risk-on trading sentiment buoys the currency despite downbeat forecasts for the UK’s economy.

The US stock index futures were modestly higher earlier in the European morning, pointing to a fairly upbeat market mood, while the safe-haven gold struggles to climb.
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Capping the Pound’s upside, however, are concerns regarding the UK’s economic growth and political uncertainty. The Bank of England (BoE) forecast a GDP contraction in Q4 and economists elsewhere are predicting the Pound will move lower before then.

Analysts at MUFG Bank forecast:

‘The risks for cable in Q3 remain to the downside given GBP tends to perform poorly as global financial conditions tighten… Liz Truss's victory could trigger a volatile GBP reaction.’

Looking ahead in the nearer term, a poll of economists suggests that UK GDP fell by 0.2% in Q2 2022: official data from the Office for National Statistics (ONS) will confirm or discredit this estimate on Friday.

According to The Guardian, the ONS data is likely to show that the extra holidays for the Queen’s jubilee in June slowed growth compared to last year, but economic activity is faltering as inflation surges.

Last week, the Bank of England warned that inflation would likely surpass 13% this year, inspiring heightened cost-of-living concerns. As markets digest the UK’s unique political and economic situation, GBP gains may be limited.


US Dollar (USD) Consolidates NFP Gains



The US Dollar (USD) is consolidating Friday’s gains on the basis of better-than-expected nonfarm payroll data but struggles to climb higher as US Treasury bond yields slide.

A generally positive tone in the equity markets further undermines any strength in the ‘Greenback’ – although optimism surrounding the Federal Reserve’s aggressive policy tightening stance could supply USD tailwinds ahead.

Over the weekend, San Francisco Fed President Mary Daly struck a hawkish tone, saying the central bank was ‘far from done yet’ on bringing inflation down and indicating that a 50bps hike isn’t only option on the table at the Fed’s next policy meeting.

Investors’ focus is now largely upon America's consumer inflation release. Core inflation is expected to climb to 6.1% for the month of July, on an annualised basis – although headline inflation is forecast to fall.

‘Right now, I think the most important thing is that inflation is too high,’ commented Mary Daly; Fed Chair Jerome Powell said after July’s meeting that another large rate hike in September was possible.

Ahead of Wednesday's release, the ‘Greenback’ is likely to trade on risk dynamics, attracting safe-haven support if markets turn bearish.


GBP/USD Exchange Rate Forecast: UK Retail Data to Drive Movement?



Looking ahead, the UK’s retail sales monitor may inspire movement tomorrow in the Pound US Dollar and other exchange rates, applying GBP downside if sales contracted in July as expected.

Sterling may find support from other factors, including risk-on sentiment and political tailwinds; however, it looks unlikely that any major UK news will strike a positive tone in the coming days. As the UK’s leadership contest becomes ever more competitive and cost-of-living concerns rise, the Pound is likely to come under pressure in the week ahead.

Elsewhere, US economic optimism is expected to increase, potentially inspiring a US Dollar upside and denting GBP/USD.







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