Weaker-Than-Forecast UK GDP Leaves Pound US Dollar (GBP/USD) Exchange Rate Under Pressure
An unexpectedly weak first quarter UK gross domestic product reading prompted the Pound to US Dollar (GBP/USD) exchange rate to slump sharply.
Investors were caught by surprise as growth dipped to just 0.1% on the quarter, dragged lower by a sharp contraction in the construction sector.
As the severity of the fall cannot be blamed on the adverse weather conditions that affected the UK in March this encouraged Pound (GBP) exchange rates to trend lower across the board.
Rob Kent-Smith of the Office for National Statistics (ONS) noted:
‘Our initial estimate shows the UK economy growing at its slowest pace in more than five years, with weaker manufacturing growth, subdued consumer-facing industries and construction output falling significantly.
‘While the snow had some impact on the economy, particularly in construction and some areas of retail, its overall effect was limited with the bad weather actually boosting energy supply and online sales.’
This weakness further diminished the odds of a May Bank of England (BoE) interest rate hike, adding to the pressure on the GBP/USD exchange rate.
Softer US GDP Could Halt GBP/USD Exchange Rate Slide
However, the Pound to US Dollar (GBP/USD) exchange rate could find some support on the back of a weaker US annualised gross domestic product figure.
If growth in the world’s largest economy shows any signs of easing this could weigh heavily on the US Dollar (USD), which has been on a bullish run in recent days.
Even so, anything short of a significant downside surprise is unlikely to be enough to undermine market confidence in the prospect of the Federal Reserve adopting a more aggressive monetary tightening approach.
As long as investors continue to bet on the Fed raising interest rates up to three more times before the end of 2018 the downside potential of US Dollar exchange rates is likely to remain limited.
Pound US Dollar (GBP/USD) Exchange Rate Weakness Forecast on Rising US Inflation
An uptick in the latest US personal consumption expenditure data may extend the losses of the Pound to US Dollar (GBP/USD) exchange rate on Monday.
Forecasts point towards a fresh acceleration in the Fed’s preferred measure of inflationary pressure, with the headline core figure expected to jump from 1.6% to 2.0% on the year.
This would improve the case for the Fed to pursue a faster pace of monetary tightening over the coming months, to the benefit of USD exchange rates.
If US interest rates look set to pursue a steeper path upwards demand for the US Dollar is likely to remain bullish.
While an element of political uncertainty still hangs over the outlook of the US economy, with the threat of protectionist trade policies not entirely put to rest, this may not be enough limit the vulnerability of the Pound to US Dollar (GBP/USD) exchange rate.