Pound US Dollar (GBP/USD) Exchange Rate Climbs amid Upbeat UK Forecasts

Modified: Monday, 15 May 2023 12:35 BST - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Climbs amid Upbeat UK Forecasts

Pound US Dollar (GBP/USD) Exchange Rate Climbs amid Upbeat UK Forecasts

The Pound US Dollar (GBP/USD) exchange rate strengthened on Monday, following reports that the UK economy may avoid recession in 2023.

At the time of writing, GBP/USD traded at around US$1.2506, an increase of just under 0.5% from Monday’s opening rates.

Pound (GBP) Lifted by Optimistic Economic Forecasts

The Pound (GBP) enjoyed support during Monday’s session, amid reports that the UK may avoid a recession in 2023.

Forecasters have predicted that the UK economy will grow by 0.2% in 2023, rather than the contract which was previously forecast.

Anna Anthony, UK Financial Services Managing Partner at EY, commented: ‘We’re still on the path to economic recovery and many businesses and consumers – particularly the most vulnerable in society – continue to face significant cost-of-living pressures. The recession that many thought was inevitable is now likely to be avoided and energy prices have fallen, boosting consumer and business sentiment.’

Furthermore, risk on trading and likely reaffirmed Bank of England (BoE) rate hike bets may have contributed further tailwinds.

As Sterling holds an increasingly risk sensitive nature, the Pound was able to gain ground as investors sought to invest in more risk sensitive assets.

Furthermore, Tuesday’s unemployment data may have resulted in elevated rate hike bets. Economists currently forecast the unemployment rate to remain the same over March, which may indicate a tight labour market.

US Dollar (USD) Dips amid Upbeat Market Mood

The US Dollar (USD) was undermined on Monday’s session, as cheery trade sapped sentiment towards the safe haven currency.

However, while the US Dollar was on the backfoot, Federal Reserve rate hike bets likely served to prevent the ‘Greenback’ from posting significant losses during Monday’s session.

On Friday, the preliminary reading from the University of Michigan consumer sentiment index showed that consumers saw prices climbing by an annual rate of 3.2% for the next five years. This perception is the highest since 2011, and is likely reinforcing bets on additional tightening from the Federal Reserve.

Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown, commented: ‘Anxieties are colliding about the effect of high interest rates, combined with worries about the banking sector and now a potential US default as the debt ceiling deadline looms. The whipsaw in sentiment may continue this week with the US retail sales snapshot due out tomorrow.’

Furthermore, the US Dollar may have been weighed down by price readjustment during Monday’s session. As the ‘Greenback’ enjoyed safe haven flows during the end of the previous week’s session, USD investors may have engaged in profit taking resulting in Monday’s downbeat trade.

Pound US Dollar (GBP/USD) Exchange Rate Forecast: UK Unemployment Data to Boost GBP?

Looking ahead for the Pound, Tuesday brings the release of the latest unemployment data. March’s unemployment rate is forecast by economists to hold at 3.8%, which may indicate a tight labour market. As such, GBP could rally amid signs that there is room for further tightening from the Bank of England.

Furthermore, average earnings excluding bonus are forecast to have increased over the three month period ending in march. On a yearly basis, forecasts are for an increase from 6.6% to 6.8%. As the BoE considers wage growth a key cause of inflation, this could strengthen the Pound further.

For the US Dollar, the latest retail sales data is due to print on Tuesday. Economists forecast a recovery, with sales growing by 0.7% on a monthly basis. Due to the significant jump from March’s 0.6% losses, this could rally the ‘Greenback’.

Elsewhere, various Federal Reserve officials are due to speak during the rest of Monday and Tuesday’s session. If they strike hawkish notes, USD could strengthen on increased interest rate hike bets.

Beyond this, market sentiment is likely to drive the pairing. If the market mood sours, USD may strengthen as it enjoys safe haven flows amid risk averse trade.

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TAGS: Pound Dollar Forecasts