Pound US Dollar (GBP/USD) Exchange Rate Rangebound as Investors Focus on UK Headlines

December 20, 2022 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Rangebound as Investors Focus on UK Headlines

Pound US Dollar (GBP/USD) Narrows as UK Industrial Action Continues

The Pound (GBP) was rudderless against the US Dollar on Tuesday, as domestic headlines in the UK remained the focus for investors amidst a lack of impactful economic data.

At the time of writing, GBP/USD traded at around US$1.2161, showing little movement from Tuesday’s opening rates.

Pound (GBP) Capped by Waves of Strikes

The Pound (GBP) was largely directionless during Tuesday’s trade, as a lack of major economic data prompted investors to focus on domestic headlines. Industrial action continued to increase across the UK, prompting investors to grow concerned over the UK’s economic outlook.

The strikes are largely prompted by workers fighting for inflation-matching wages and fairer treatment from management. Tuesday saw Nurses continue their strike action, with 100,000 members walking out over pay disputes and concerns for patient health.

Meanwhile, house prices were predicted to fall further in the UK, which stoked further recession fears among GBP investors during Tuesday’s session. As a signifier that a country is in recession, the 5% drop forecast in 2023 by Nationwide may have weighed on GBP.

Robert Gardner, Nationwide’s Chief Economist explained further. He stated: ‘The risks are skewed to the downside, but there is still a good chance that we can achieve a relatively soft landing next year with activity stabilising modestly below pre-pandemic levels and house prices edging lower, perhaps by around 5%.’

US Dollar (USD) Subdued by Risk-On Market Mood

The US Dollar (USD) saw muted trade during Tuesday’s session, care of a risk-on market impulse brought about by the Bank of Japan (BoJ). The BoJ announced on Tuesday morning that they were going to expand their yield curve control policy, allowing long-term interest rates to be targeted by prospective buyers.

With this in mind, investors pulled away from the ‘Greenback’ to support other currencies, such as the Yen, which held more promising investment opportunities.

Further mollifying the US Dollar was gloom around the US housing market. While not normally an impetus for movement, the lack of meaningful macroeconomic data led investors to examine domestic headlines, similar to the Pound.

With building permits in November falling to 1.342 million, down from 1.512 million and below a forecast of 1.485 million, the housing market for new builds is becoming gloomier for the US. This led to investors pulling further away from the US Dollar, as the US economy appears to be struggling.

Pound US Dollar (GBP/USD) Exchange Rate Forecast: UK CBI Data to Weaken Sterling?

Looking ahead for the Pound, the Confederation of British Industry (CBI) are due to release their retail sales data for December. A decline from -19 to -23 is expected, which may drag Sterling lower by reflecting the increasingly poor conditions for the UK’s retail sector. Between the cost-of-living crisis, recession and industrial action, households across the UK are finding themselves with less and less income to spend in stores, leading to the retail sector’s woes.

For the US Dollar, data is largely thin on the ground ahead of the latest core PCE price index YoY data on Friday. As the Federal Reserve’s preferred gauge of inflation, the figure could run in countenance to the Fed’s continuous hawkish tone. The confusion may then serve to weaken the US Dollar, as investors become unsure of the direction for future interest rate hikes.

Elsewhere, risk appetite across markets may also play a key figure in shaping the pairing. Due to the US Dollar’s status as a safe-haven currency, and GBP’s increasingly risk-sensitive nature, a risk-averse market mood could see GBP/USD weaken.

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