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Will GBP/USD Narrow amid Falling US Inflation?


Pound US Dollar (GBP/USD) Exchange Rate Muted as Investors Await Fed Powell Speech

The Pound US Dollar (GBP/USD) exchange rate is narrowing so far, as investors await a speech from Federal Reserve Chair Jerome Powell.

At the time of writing, GBP/USD is trading at around US$1.2163, showing little movement from the morning’s opening rates.

Pound (GBP) to Struggle amid Thin Trading Conditions?

The Pound (GBP) may struggle over the week, as trading conditions remain thin until Friday. This lack of macroeconomic data could see investors remain focused on domestic headlines in the UK.

Industrial action appears to be showing little sign of abating, and any continued developments could weigh on Sterling. While the Government is scheduled to announce a minimum service bill later today, it is likely to prove controversial.

The UK’s economic outlook may continue to be a question on investor’s lips throughout the week too. Businesses are currently digesting the change in support regarding energy bills, with many pessimistic about the future. As such, the Pound may continue to seem unfavourable through the week.

However, the Pound has become increasingly risk-sensitive over recent months. Because of this, a shift in risk appetite across markets could bring modest support to GBP.

Friday brings a key data release, as the UK’s MoM GDP data for November is released. A fall from 0.5% to -0.2% is expected, which could weaken Sterling by highlighting how the UK economy is shrinking.

US Dollar (USD) to Slide as Inflation Falls Further?

The US Dollar (USD) may weaken over the week, as investors await the latest inflation data for December.

Headline and core inflation are both expected to fall, with headline inflation forecast to drop from 7.1% to 6.5%. The Federal Reserve has struck a continually hawkish tone, and has recently discussed slowing the pace of interest rate hikes.

Fed Chair Jerome Powell is scheduled to deliver a speech this afternoon, which could bring strength to the ‘Greenback’. However, if he strikes a dovish tone, the US Dollar could soften.

Furthermore, the Michigan consumer sentiment index is expected to show an uptick in optimism. With the US’ economy heavily based on consumption, this increase in expectations could bring support to the ‘Greenback’ on Friday.

Elsewhere, the cautious market mood could shift to risk aversion over the course of the week. Should this happen, the safe-haven ‘Greenback’ could see gains against riskier peers.

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