The Pound US Dollar exchange rate has tumbled to its worst levels since June this week and has been unable to recover much from its weekly lows despite low market expectations for Federal Reserve hawkishness.
GBP USD began the week trading at 1.3010 and hit a monthly low of 1.2843 on Wednesday evening. The pair has recovered slightly but remains below 1.29.
Pound (GBP) Outlook Little Changed Despite Decent Data
Recent UK data has been mixed, but even some of the best UK data in weeks was unable to encourage investors to buy the undervalued Pound up from its recent lows.
UK inflation from July fell short of forecasts earlier, indicating that the Bank of England (BoE) had increasing breathing room to keep monetary policy at its loosest levels on record.
Yesterday’s UK job market report was generally optimistic though, with the unemployment rate unexpectedly improving from 4.5% to 4.4% and wage growth beating expectations in both key prints.
However, while wage growth improved, it is still outstripped by inflation leaving real wages falling.
Despite this, today’s July UK retail sales report wasn’t hugely disappointing.,
Monthly retail sales actually beat expectations in July, coming in at 0.3% rather than 0.2%. However, the previous figure was revised down from 0.6% to 0.3%.
Yearly retail sales disappointed though. Not only was the previous figure revised down from 2.9% to 2.8%, the July result fell short of 1.4% forecasts and came in at 1.3%.
While analysts noted that warnings of the UK pay squeeze affecting consumer spending habits may be overblown, a lot of uncertainty remains about Britain’s economic outlook because of falling real wages.
The Pound outlook could shift again next week, depending on the latest UK Gross Domestic Product (GDP) projections.
UK growth is currently projected to have been 1.7% year-on-year in Q2 and 0.3% quarter-on-quarter. If it beats expectations, the Pound could see a stronger recovery against the US Dollar.
However, with UK inflation and real wage growth slipping, investors doubt there is any reason for the BoE to tighten UK monetary policy in the foreseeable future.
US Dollar (USD) Outlook Mixed as Fed Maintains Caution
The Federal Reserve’s latest meeting minutes didn’t do much for US Dollar hawks, as policymakers indicated they were becoming more uncertain about the US inflation outlook.
What was initially expected to be a small transitional drop in inflation has seen US inflation falling short of expectations since June.
This has left markets doubting that the Federal Reserve will hike US monetary policy a third time before the end of 2017.
While the Fed still seemingly intends to begin unwinding its massive balance sheet in the coming months, some officials have indicated they would rather wait for inflation to show stronger solidity before rates are hiked again.
As a result, Fed rate hike bets remain low and the US Dollar’s strength over the past week has been limited.
The latest US building permits and housing starts results failed to impress either.
Still, the US Dollar could see stronger demand so long as there are hints that inflation is improving. If Michigan University’s inflation expectations survey impresses tomorrow, this could boost the US Dollar outlook slightly.
After that though, next week’s US data won’t be as influential. USD investors are more likely to react to any potential Fed comments at the upcoming Jackson Hole symposium than US data next week.
GBP USD Interbank Rate
At the time of writing this article, the Pound US Dollar exchange rate trended in the region of 1.2864. The US Dollar to Pound exchange rate traded at around 0.7772.
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