Pound To Dollar Week Ahead Forecast: Fed Strength Leaves GBP Vulnerable

Pound-Dollar could recover if UK PMIs improve, while weaker US durable goods orders may take some of the recent momentum out of the Dollar.

The Pound US Dollar (GBP/USD) exchange rate collapsed last week as the Federal Reserve delivered its first interest rate hike in three years.

At the time of writing, GBP/USD was trading at around $1.3365. A 1.1% slump from the start of last week’s session.

DAILY RECAP:

The US Dollar (USD) was catapulted higher last week, following the Federal Reserve’s latest interest rate decision.

Going into the meeting, expectations were high, with USD investors anticipating some clear hawkish signals to accompany a widely expected 25bps rate hike from the bank.

Despite setting such a high bar, the Fed was able to clear it with ease, as Fed Chair Kevin Warsh – who had previously been reluctant to offer any explicit guidance – stressed the need to do more to control inflation and strongly signalled that the US central bank will deliver another interest rate hike before the end of the year.

While the ‘Greenback’ subsequently relinquished a portion of these gains as USD investors booked their profits, the US Dollar was still able to close the week significantly higher.

The Pound (GBP) was subdued through the first half of last week, weighed down by underwhelming UK macroeconomic data.

Tuesday’s jobs report initially seemed supportive as domestic unemployment held steady instead of rising as forecast, yet GBP investors were ultimately left disappointed by signs of underlying weakness in the UK labour market.

Wednesday’s inflation figures did little to improve Sterling’s fortunes, as a rise in headline price growth was offset as core inflation remained flat.

Sterling selling pressure then intensified on Thursday following the Bank of England’s (BoE) own interest rate decision.

While the BoE’s decision to leave rates on hold was widely expected, and policymakers hinted at the need for future hikes, the Pound still stumbled as the BoE fell further behind its peers in restarting its hiking cycle.

However, Sterling managed to mount a partial recovery on Friday, courtesy of an unexpected rebound in UK retail sales last month.

Near-Term GBP/USD Forecast: UK PMIs to Offer Respite for Sterling?

Looking ahead to this week, the Pound to US Dollar exchange rate may mount a recovery with the publication of the UK’s latest PMI data.

Should September’s preliminary figures report that activity in the UK’s private sector continued to accelerate, it may help to lift some of the recent malaise surrounding Sterling.

Meanwhile, the most impactful US economic release this week will be the latest US durable goods order data, with an expected contraction in order growth last month potentially dragging in USD in the second half of the session.

Our currency coverage draws on live market data, official economic releases and published bank research.