Pound US Dollar (GBP/USD) Exchange Rate Falls as Cost of Living Pressures Take Spotlight

March 7, 2023 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Falls as Cost of Living Pressures Take Spotlight

Pound US Dollar (GBP/USD) Exchange Rate Falls as Cost of Living Pressures Take Spotlight

The Pound US Dollar (GBP/USD) exchange rate fell on Tuesday, as cost of living pressures undermined Sterling’s appeal.

At the time of writing, GBP/USD traded at around US1.1989, a decline of roughly 0.3% from Tuesday’s morning rates.

Pound (GBP) Undermined by Cost of Living Woes

The Pound (GBP) traded without direction on Tuesday morning, as a lack of impactful macroeconomic data left GBP vulnerable to domestic headwinds.

With this in mind, GBP investors shifted their focus to news across the UK. On Tuesday morning, the British Retail Consortium (BRC) released their latest retail sales monitor. While this showed that retail sales had increased, with the data printing above forecast at 4.9%, the accompanying analysis painted a bleak picture.

Paul Martin, the UK Head of Retail at KPMG, commented: ‘Consumers are continuing to hold back on non-essential spending with sales of clothing, footwear and accessories – which have been very influential in spending for many months – continuing to decline in February. Furniture and homeware have been driving sales growth on the high street and online but we are starting to see more categories record negative sales year on year, as household budgets remain squeezed.’

Elsewhere, a souring market mood may have also added weight to Sterling. As an increasingly risk sensitive currency, the Pound has become more susceptible to shifts in risk appetite.

Furthermore, waning optimism over the so-called ‘Windsor Framework’ could be applying more pressure. The DUP formed a panel to pore over the deal, and outlined they could take up to a month before reaching a deal.

US Dollar (USD) Quietens ahead of Powell Testimony

The US Dollar (USD) traded quietly on Tuesday morning, as USD investors awaited Federal Reserve Chair Jerome Powell’s testimony to the US Congress.

Powell is expected to discuss the Fed’s current monetary policy, and may argue in favour of the interest rate hikes they have so far delivered.

Currently, a 25bps rate hike is priced in by markets for the Fed’s March decision, with the focus shifting to hawkish forward guidance from Fed Officials. As the Chair, Powell’s comments are likely to hold sway over the ‘Greenback’s direction.

Elsewhere, an upbeat market mood likely weighed on the US Dollar during Tuesday’s session. The upbeat trade was likely caused by China’s above forecast improvement in exports, leading to substantially larger than expected trade surplus. While Chinese exports remain down compared to the past year, the post-Covid recovery showed signs of promise.

Because of this, the safe-haven US Dollar is lacking in impactful support as traders sought to purchase more risk-heavy assets.

Pound US Dollar (GBP/USD) Exchange Rate Forecast: US Data in Focus

Looking ahead for the US Dollar (USD), Wednesday brings two key data releases which are likely to drive movement for the ‘Greenback’.

First, the latest balance of trade data is scheduled to print. January’s data is forecast to show an increase in the US’ trade deficit, from $-67.4bn to $-68.9bn which may weigh on the US Dollar, as it shows a further decline in the country’s exports.

Then, the latest JOLTs job openings data is due to print. January’s data is forecast to show a decline in jobs created, falling from 11.012 million in December to 10.5 million. If this prints as forecast, it could point to a loosening in the US’ labour market, and weaken the ‘Greenback’.

After this, Federal Reserve Chair Jerome Powell will resume his testimony to the US congress. If he offers hawkish forward guidance and defends the Fed’s current tightening policy, USD could climb.

For the Pound (GBP), data releases are minimal in the short term. Because of this, Sterling may continue to be vulnerable to domestic headwinds. With the cost of living crisis being a recurring feature in UK headlines, any further news of how the crisis is impacting UK households and consumers may lean heavily on Sterling.

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