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Pound US Dollar (GBP/USD) Exchange Rate Could Reverse its Gains on US CPI and Brexit Tensions

The Federal Reserve bank building in New York, USA.

GBP/USD Exchange Rate Gains on UK GDP

The Pound US Dollar (GBP/USD) exchange rate has firmed this morning following the UK’s latest GDP data. The country’s economy grew by 0.4% in August, rebounding from July’s downwardly revised 0.1% contraction.

However, as the GDP figure was below expectations of 0.5% growth, and with the US inflation rate for September due out this afternoon, Sterling may struggle to hold on to its gains.

Could Brexit Tensions Undermine the Pound (GBP)?

The Pound (GBP) could find its upside limited today, as the UK’s broadly positive GDP report also came with some caveats.

First of all, the UK economy still remains below pre-pandemic levels, and growth for the third quarter of this year looks like it will be below the Bank of England’s (BoE) expectations last month.

In addition, some analysts believe growth will have slowed significantly in September, as the fuel crisis, growing inflationary pressures and ongoing labour shortages squeezed the UK economy.

As markets digest the data and all its implications, GBP/USD may lose its upward momentum.

Brexit developments could also have a big impact on the Pound today, as they have done in months past.

The EU is expected to offer concessions to the UK government in an attempt to resolve the dispute over the Northern Ireland protocol.

The bloc will propose to remove up to 50% of customs checks on goods crossing the Irish Sea, including more than half of the checks on meats and plants entering Northern Ireland, despite opposition from the French government.

Brexit tensions are currently at an all-time high, with the UK’s Brexit Minister Lord Frost calling for the existing Northern Ireland protocol to be ripped up and replaced by a new agreement, saying that if the EU did not consider such a move it would be a ‘historic misjudgement’.

Lord Frost also repeated the UK’s intention to trigger article 16, an emergency measure to avoid ‘serious economic, societal or environmental difficulties that are liable to persist’, if an agreement cannot be reached.

How the UK government responds to the EU’s latest attempt at resolution could have a big influence on GBP exchange rates. If tensions escalate, Sterling could recede, whereas if a resolution looks likely, it could stay strong.

US Dollar (USD) Might Rebound if Inflation Prints as Expected

The US Dollar (USD) has been somewhat subdued today, as USD investors await the latest US CPI.

With US inflation expected to have remained at an eye-watering 5.3% in September – which would be its fifth month at 5% or higher – we may see the ‘Greenback’ begin to strengthen again in the run-up to the release.

If the CPI prints as expected, it would support the case for the Federal Reserve to go ahead with tightening monetary policy. This could send the US Dollar skyward, as hawkish expectations might boost USD and worry markets, triggering a risk-off mood that further benefits the ‘Greenback’.