Pound US Dollar Exchange Rate News: GBP/USD Firmed Despite Soft UK GDP Growth

Modified: Monday, 12 September 2022 13:05 BST - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Firmed Despite Soft UK GDP Growth

Pound (GBP) Fluctuated on Mixed Economic Data

The Pound (GBP) struggled to find much demand on Monday after GDP growth data showed a softer-than-expected expansion in the economy.

GDP expanded by 0.2% MoM for July, with the service sector being behind the main driver of the economy, with a 0.4% expansion from June. Despite rebounding from a 0.6% contraction, missing an expected 0.4% forecast weighed on the Pound. But with soaring prices, worker shortages across the board, the economic outlook for the UK remains uncertain. Jake Finney, economist at the accountancy firm PwC said of the data:

‘Despite today’s positive growth figures, our expectation is that the UK economy will contract in the third quarter of 2022, following its 0.1% contraction in the second quarter. This would mean that the UK enters a technical recession for the first time since lockdown restrictions ended.’

Meanwhile, propping up Sterling, somewhat surprisingly, is Ukraine’s equally surprising counter offensive that has seen them regain lost territory to Russia. John Hardy, Head of FX Strategy at Saxo Bank, explained how the Pound and Euro are making their own gains as Ukraine’s success can alleviate the energy crisis. He said:

‘The surprise offensive and the re-capture of a key transport hub in the northeastern sector of the front after recent focus on operations in the south caught the market by surprise and has seen the euro and sterling rebounding versus the US dollar in early trading this week.

‘It will take some time and further developments to assess whether Ukraine can capitalize on its gains and this in turn triggers a new stance from Russia on its energy policy.’

US Dollar (USD) Softened amid a Risk-On Market Impulse

The US Dollar (USD) failed to find much strength as an improved global market mood dampened the demand for safe-haven flows.

The current success of Ukraine’s counter-offensive to reclaim lost territory is buoying investors and inspiring a risk-on impulse with hopes of a reduced energy squeeze on Europe. Global market sentiment could improve on any further good news out of Ukraine, stemming the safe-haven flows that have supported the ‘Greenback’ since the beginning of Russia’s invasion of Ukraine.

Propping up the US Dollar, however, is the continued hawkish stance from the Federal Reserve as policymakers refuse to deviate from their policy tightening cycle, pushing for further rate hikes. But an expected softening of inflation could see the central bank turn dovish. With inflationary pressures expected to ease, the need for further aggressive hikes will wane.

But any continued weakening in a resilient labour market, combined with softening inflation, could in fact slow the Fed’s aggressive tightening cycle. Economists at the National Bank of Canada said that the US Dollar could depreciate in the coming months:

‘Full-time employment, meanwhile, has stagnated since the beginning of 2022. This suggests that companies may be on the verge of cutting back on hiring in the coming months. If we are right, the FOMC may soon recognize that the end of US monetary tightening campaign is in sight, a development that could weaken the greenback.’

GBP/USD Exchange Rate Forecast: UK Jobs Data to Bolster the Pound?

Looking ahead to Tuesday’s session, the Pound US Dollar exchange rate could see further movement with the release of employment figures and benefit claims. If data prints to forecast, Sterling could see a jump.

Meanwhile, the US Dollar could see a softening in demand if inflation data prints as expected. With CPI YoY expected to fall for the second consecutive month, a softening of inflation could temper rate hike bets, bringing the ‘Greenback’ down with it.

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