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Will Cooler UK Inflation Data Weigh on Pound US Dollar (GBP/USD) Exchange Rate?

Stacks of US Dollar (USD) banknotes.

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

The Pound US Dollar (GBP/USD) exchange rate is trading narrowly today. Increased bets on a 25bps rate hike from the Federal Reserve in May could be denting the pairing. Alongside this, elevated US Treasury bond yields may be adding to the exchange rate’s downturn.

Upbeat forecasts for the UK economy may be supporting GBP/USD, however. The EY ITEM club has predicted that the UK economy will expand by 0.2% in 2023.

At time of writing the GBP/USD exchange rate is at around $1.2404, virtually unchanged from this morning’s opening figures.

Could Evidence of Easing Inflation Pull Pound (GBP) Lower?

The Pound (GBP) could stumble over the course of the coming week if crucial data releases point to cooling inflation.

To begin with, employment data on Tuesday may begin Sterling’s downturn if it prints as forecast. February’s wage growth is set to slip to 5.1%. The Bank of England (BoE) has regularly cited a potential wage-price spiral as one of the reasons behind further interest rate hikes.

The Pound (GBP) could see deep losses on Wednesday if March’s inflation cools as forecast. Headline inflation is set to fall to 9.8%. The figures could also prompt markets to pare back bets on a 25bps rate hike from the BoE at their May meeting.

Finally for Sterling, a fall in March’s retail sales on Friday could see the currency lose further ground. Following a surprise jump in February, March’s sales are set to fall by 0.5%.

Will Fed Bets Continue to Sustain US Dollar (USD)?

Movement in the US Dollar (USD) may be driven by shifting Fed rate hike expectations this week. A speech from policymaker Michelle Bowman on Tuesday could prompt shifts in USD if markets pick up on any definitive hints.

On Thursday, a forecast uptick in initial jobless claims could pull the US Dollar lower if claims print as expected. Claims have remained higher over recent weeks, pointing to slack in the US labour market.

April’s PMI data could have a mixed effect on USD on Friday. On the one hand, performance in the US services sector is expected to remain in positive territory.

On the other hand, services sector output is set to slip slightly from its March position. Additionally, the US manufacturing sector is set to fall further into contraction which could dent confidence in USD.

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