GBP/USD Outlook: Pound Dollar Lacks Conviction as Price Action Stalls
Despite a slew of good data out of the UK last week, the Pound US Dollar exchange rate stalled. The US dollar swung sharply after the release of the US Producer Price Index, which showed a 0.3% month-on-month jump. This was enough to spur speculation that the Fed might slow interest rate hikes a bit. However, the news was overshadowed by the unexpected increase in jobless claims, which could be a sign that the US economy is beginning to soften.
The British pound enjoyed a rally against most peers last week, largely in part to the hawkish rhetoric of Bank of England Governor Mark Carney. The minutes of the BoE's recent policy meeting contained some notable tidbits, including the fact that labor market slack was evaporating faster than expected. The slew of good UK economic data has given investors a little hope that the recession isn't as severe as many had previously thought. On the other hand, the release of a new survey of retail sales and distribution trades weighed on household spending power.
The Pound also got a lift from the release of a PMI reading that beat expectations. While the figure was a bit sluggish, it was the most significant number printed in the report. The underlying sentiment of the UK retail sector was bleak, with signs that consumer spending is slowing and the cost of living crisis is taking its toll on household spending. This could be a headwind for the Pound.
While the British pound has been consolidating against the US dollar for the past few weeks, there are signs of weakness. The GBP/USD currency pair is currently trading around US$1.2068, which is below its seven-week high. In the coming weeks, it will be a battle of interest rates between the two nations. With the US economy showing signs of sluggishness, the likelihood of a strong US Dollar recovery is bleak. A break of the 1.23 handle and a move to 1.24 would be required to drive prices higher. The next leg of the directional move will likely depend on the usual Weekly Initial Jobless Claims data due early next week.
The Fed's most recent meeting minutes did not do the British pound any favors. The FOMC noted that "there is little reason to expect a substantial improvement in inflation over the near term," but that the Fed is considering easing rate hikes in order to preserve the "strength of the labor market and financial conditions." The Fed is also keeping a close eye on the US housing market, which is back in the spotlight after a couple of years of a slowdown. This could spell trouble for traditional carry currencies like the pound.
In terms of the 'big three' FX indicators, the Pound is at the bottom of the pack. While the US is the biggest currency by market capitalization, the euro has been the king of the hill since the turn of the century. The British pound is lagging behind its peers in terms of the GDP growth rate and the unemployment rate.