GBP-USD Exchange Rate Drifts to a Six-Week Low in May
Following a slight stutter, the pound accelerated to an 11-month high against the dollar in early May after the Fed raised US interest rates but signalled an end to its tightening cycle is on the horizon. The US central bank hiked its benchmark rate by a quarter point but there was no mention of the need for further rate increases in its policy statement – sending the dollar lower.
With expectations that the Fed is approaching the end of its rate hiking cycle casting a cloud over the dollar, the GBP-USD pair was given a further boost by the pound’s contrasting fortunes. Stronger-than-expected data from the UK economy – which has managed to evade a deep recession – helped the pound hit a more than one-year high of 1.26680 on 8 May, its strongest level against the dollar since April 2022.
The dollar’s woes were exacerbated by downbeat inflation numbers that showed the price of goods and services in the US remained stubbornly high in April, rising 4.9.% from 12 months ago – almost equalling the 5% rise posted in March as prices continue to increase at a rate that is more than twice the Fed’s 2% a year target.
The Bank of England (BoE) raised interest rates by a quarter of a percentage point to 4.5% on 11 May – a 12th successive increase in borrowing costs – as it seeks to dampen the highest inflation of any major economy.
The pound initially rallied against the dollar, before falling 0.9% lower in the hours following the BoE’s announcement. Was this a sign that optimism is fading in the best-performing currency against the dollar this year in the G10 group of advanced economies? The second half of May would suggest so.
By 18 May, the GBP-USD pair was sliding back towards a three-week low as investor concerns grew about the UK economy stagnating and the labour market softening. This mood was reflected by data showing Britain’s jobless rate increased to 3.9% in the three months to March.
A combination of lacklustre UK PMI data – which printed below forecasts – and a robust dollar dragged the pound to a six-week low just above the 1.23 benchmark on 25 May. Signs of a resilient US economy and expectations that US interest rates could remain higher for longer gave the dollar a shot in the arm.
The GBP-USD pair entered the last week of May near two-month lows, remaining on course to record close to a 2% loss for the month.
GBPUSD: Year-to-Date
Looking ahead
The outcome of BoE’s next meeting of interest rate setters is announced on 22 June – who are widely tipped to hike rates from 4.5% to 4.75%. Before then, they will have to digest inflation figures for April and May, as well as updates on wage growth and unemployment figures.
Influential data from the UK economy in June: ILO unemployment rate (13 June), CPI (14 June), services PMI (23 June), GDP (30 June).
The Fed is expected to pause its rate hiking cycle at its June 13-14 conflab of policymakers after ten consecutive meetings with rises. If it decides to take a breather, the US central bank will leave the federal funds target rate unchanged for the first time since early 2022.
Influential data from the US economy in June: ADP employment change (1 June), manufacturing PMI (1 June), nonfarm payrolls (2 June), services PMI (5 June), CPI (13 June), retail sales (15 June), GDP (27 June).
The GBP-USD rate, which was bookended by an 11-month high and a six-week low in May, is expected to continue its slide lower over the next few months according to Danske Bank. It predicts that tighter global financial conditions will support the dollar and undermine the pound, causing the pair to fall to 1.20 and 1.17 in six and 12 months respectively.
