Pound US Dollar (GBP/USD) Exchange Rate Climbs amid Signs of Cooling US Inflation

December 23, 2022 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Climbs amid Signs of Cooling US Inflation

Pound US Dollar (GBP/USD) Exchange Rate Boosted by Risk-On Mood

The Pound US Dollar (GBP/USD) exchange rate rose on Friday. A risk-on market mood bolstered the currency pair despite a lack of UK data.

Poor US data releases also weighed on GBP/USD. Poor durable goods figures and evidence of cooling inflation saw investors pare back Fed rate hike bets.

At time of writing the GBP/USD exchange rate was at around $1.2069, which was up roughly 0.2% from that morning’s opening figures.

US Dollar (USD)

The US Dollar (USD) edged lower on Friday. A return of global risk appetite weighed on the safe-haven ‘Greenback’. Fears of a global economic slowdown helped limit the impact of the risk-on mood however, as well as concerns regarding China’s Covid-19 case levels.

Multiple poor data releases contributed to the currency’s losses on Friday, and saw markets pare back their bets on further interest rate hikes from the Federal Reserve.

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An above-forecast fall in durable goods orders in November reduced the chances of a ‘soft landing’ for the US economy. The Fed had previously highlighted the US economy’s resilience in the face of interest rate hikes as a reason to continue with its hawkish tightening policy.

A slip in the core PCE price index, the Fed’s preferred measure of inflation, also weighed on USD on Friday. Evidence of cooling inflation may prompt the central bank to pare back its strategy of additional aggressive interest rate hikes.

The Fed’s generally hawkish rhetoric helped limit losses for USD, however. Jobless figures on Thursday pointed to a still tight labour market, increasing bets on future hikes.

Pound (GBP) Rises Despite 2023 Recession Fears

The Pound (GBP) edged higher on Friday amid a return of global risk appetite. The impact of widespread industrial action kept pressure on the currency, however.

Passengers travelling into the UK were warned of severe delays at immigration as Border Force staff began the first of a series of strikes. Friday also saw strikes from Royal Mail and rail sector staff.

The impact of soaring inflation on the UK’s cost-of-living crisis also weighed on Sterling. A survey released by the Food Standards Agency (FSA) found that 61% off families in the most deprived areas of England were buying less food.

The prospect of a 2023 recession for the UK also kept GBP on the defensive on Friday. Markets continued to digest the final reading of third quarter GDP figures on Thursday, which were revised lower. Analysts signalled that the data all but confirmed are recession next year.

GBP/USD Exchange Rate Forecast: Will Evidence of Tight Labour Market Help USD Recover?

Looking to the week ahead, data for both of the currencies is set to be thin on the ground due to the festive period and bank holidays in the UK.

For the US Dollar, the latest jobless claims figures on Thursday could push USD higher if they print as forecast. The figures are expected to remain close to previous week’s releases, continuing to point to a tight labour market in the US. The data could also increase bets on further interest rate hikes from the Fed, further bolstering the currency.

Any further comments from Fed policymakers in the coming week could also prompt movement in the US Dollar. Board members have continued to signal the need for further rate hikes in the face of soaring inflation and tight labour market.

Looking ahead for the Pound, the latest data for the UK housing sector could weigh on Sterling if it follows recent trends. November’s mortgage approvals figures could pull the Pound lower if they point to further weakness in the UK’s housing market.

The impact of the UK’s ‘winter of discontent’ could also dampen enthusiasm for the currency. Further strikes across the country’s rail are set to have a negative effect on profits for the UK’s dominant services sector.

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