Pound Sterling to Dollar Forecast: US CPI Keeps Fed on Hawkish Path
– Written by
James Fuller
STORY LINK Pound Sterling to Dollar Forecast: US CPI Keeps Fed on Hawkish Path
The Pound to Dollar exchange rate (GBP/USD) has battled to hold the 1.3500 level after much stronger-than-expected UK GDP data provided Sterling with fresh support.
July growth comfortably beat forecasts, but the Pound remains constrained by an increasingly hawkish Federal Reserve outlook, with markets now heavily pricing a US rate hike next week.
GBP/USD Forecasts: Battle around 1.35
The Pound to Dollar (GBP/USD) exchange rate attempted to stabilise around the 1.3500-1.3520 area on Friday as much stronger than expected UK growth data provided Sterling with support.
GBP/USD had come under pressure earlier in the week as a surge in global bond yields and rising energy prices strengthened the Dollar and undermined risk appetite.
The UK economy expanded by 0.4% in July compared with consensus forecasts for no growth, while annual growth accelerated to 1.6% from expectations of 1.2%.
Services output also increased by 0.4%, reinforcing evidence that the UK economy has retained more momentum than expected despite the energy shock.
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The stronger figures helped Sterling recover some ground, although GBP/USD remained capped by rising US rate expectations.
UoB had commented; “Although GBP has been edging higher over the past few days, there has been no significant increase in upward momentum.”
The 1.3480-1.3500 region remains an important support area, while a sustained recovery above 1.3550 would ease the immediate downside pressure.
US Inflation Strengthens Fed Hike Case
US consumer prices increased 0.4% in August, matching expectations, while the annual inflation rate remained at 3.4%.
Core prices increased 0.3% on the month and 2.4% year-on-year.
Although the headline figures were broadly in line with forecasts, the data reinforced expectations that the Federal Reserve will raise interest rates at next week’s meeting.
Markets increased the implied probability of a 25-basis-point hike to around 85%, compared with roughly 70% before the CPI release.
US Treasury yields initially jumped following the figures, with the 10-year yield briefly touching 4.99%, its highest level in almost three years.
ING had commented; “We continue to see upside risks for the dollar. If front-end USD rates remain around current levels and global sentiment stays fragile, we cannot see a fundamental reason for persistent USD underperformance.”
The Dollar nevertheless struggled to secure a major advance as markets also responded to a partial recovery in equities and a retreat in oil prices.
Bond and Energy Risks Remain Elevated
Bond-market conditions remain an important threat to both Sterling and global risk appetite.
The US 10-year Treasury yield remains close to 5%, while the UK 10-year gilt yield has traded near its highest level since 2007.
Rabobank commented; “Rising yields are forcing difficult decisions everywhere, as governments face higher interest bills and deteriorating public finances. Choices can be politically expensive, but not making any choices will cost hard currency.”
Higher yields increase debt-servicing costs and add further pressure to already stretched fiscal positions.
Energy markets remain equally important.
Brent crude surged above $107 per barrel on Thursday before retreating towards $104 on Friday amid reports of possible talks aimed at stabilising shipping through the Strait of Hormuz.
Oil remains more than 8% higher on the week, however, leaving inflation risks elevated.
Danske Bank had commented; “Oil flows through the Strait of Hormuz remain far below pre-war levels and pressure on Red Sea routes is rising.”
For GBP/USD, the immediate battle remains around 1.3500.
Stronger UK growth provides Sterling with some protection, but a Fed hike next week is now heavily priced and US yields remain close to multi-year highs.
A decisive break below 1.3480 would expose the mid-1.34s, while a recovery above 1.3550 would improve the short-term outlook.
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TAGS: Pound Dollar Forecasts
