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Will GBP/USD Weaken on Upbeat US Economic Data?

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Pound US Dollar (GBP/USD) Exchange Rate Weakens despite Strong UK Economic Growth

The Pound US Dollar (GBP/USD) exchange rate is weakening this morning, as a mixed market mood prevents Sterling from fully capitalising on upbeat economic data.

At the time of writing, GBP/USD is trading at around US$1.2384, a drop of almost 0.5% from the morning’s opening rates.

Will GBP Rally on Signs of Strong Economic Growth?

The Pound (GBP) could gather some momentum through the rest of the session, following this morning’s private sector index releases.

The UK’s manufacturing sector contracted further, printing at 46.6 in April down from March’s print of 47.9. While this does indicate further slowdown in the sector, this was offset by the UK’s service index expanding far more than expected.

This release printed at 54.9, above forecasts of a hold at 52.9. Because of the health shown in the vital sector, the door was opened for additional tightening from the Bank of England (BoE). As investors continue to pore over this release, Sterling could rally.

On the other hand, due to the morning’s downbeat retail sales data, the BoE’s position for further tightening is narrowing. With the vital sector showing signs of struggling, rate hike bets may be pared back over the course of the session. This could weigh on the Pound.

However, if the market mood remains mixed Sterling may struggle to gain momentum over the session. With the Pound being an increasingly risk-sensitive currency, a souring mood could weigh heavily on it.

That said, if the market mood improves later in the European session, Sterling could recover some ground against the safe-haven US Dollar.

Will USD Rally on Resilient US Economic Activity?

For the US Dollar (USD), the latest private sector indexes are likely to provide an impetus for trade. With both manufacturing and service sector indexes for April due to print this afternoon, signs of growth in the US economy could bring cheer to USD traders.

However, they will bring the additional possibility of further interest rate hikes from the Federal Reserve. If the US economy is seen to be resilient, the Fed is likely to pursue at least one more rate hike at their May meeting.

As such, USD investors could move to support the ‘Greenback’ on these elevated bets. Furthermore, increased tightening could have a negative impact on the US economy. As the world’s largest, this may prompt anxieties over the health of the global economy.

Because of this, the market mood could sour further. As a safe-haven currency, this would likely bring safe-haven flows to the US Dollar, elevating it above riskier assets such as the Pound.

However, if the indexes print below forecasts, these bets may dissipate. With this in mind, investors could shift to riskier assets which may weigh on the ‘Greenback’.

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