GBP-USD Exchange rate posts overall gains in May
The pound dollar exchange rate initially traded without a clear direction just above 1.25 at the start of May, following the Federal Reserve’s unexpectedly dovish approach to monetary policy, before robust US data caused it to tumble.
The Federal Open Market Committee (FOMC) voted for its sixth consecutive interest rate hold, but markets were blindsided by Fed Chair Jerome Powell’s seemingly neutral stance.
The pound slipped to a seven-day low against the dollar around 1.2474 on 8 May amid shifting interest rate cut bets on both sides of the Atlantic.
The UK currency was muted by a dovish policy split by Bank of England (BoE) rate-setters the following day. As widely expected, the central bank held interest rates at 5.25% during their May meeting; however, their voting split undermined the pound. Seven of the nine Monetary Policy Committee (MPC) members voted to keep rates unchanged, while two members voted for an immediate cut. This stoked speculation of a June rate cut which sapped pound sentiment.
Having clambered back above 1.25, the pound dollar exchange rate was rangebound as the dovish policy outlook absorbed the impact of a better-than-expected UK GDP print. The data confirmed the UK had climbed out of its shallow recession at the end of 2023.
The pound began to firm against the dollar on 13 May amid rising risk appetite, which dented the safe-haven dollar’s appeal.
Having risen into the 1.25 mid-range, a brief tumble followed reports of rising UK unemployment, reinforcing market speculation of a June interest rate cut. The jobless rate increased for the second consecutive month in March, printing as expected at 4.3% and edging higher from February’s reading of 4.2%.
The pound dollar rate was given a shot in the arm on 15 May by the latest US inflation prints, causing it to surge to a five-week high. Cooling headline inflation, which eased to 3.4% in April, dragged the dollar lower as investors dialled up their Fed rate cut bets.
This was compounded by slowing US retail sales in April, which printed at 3%, well below expectations of 3.8% and down from the same in March.
The pound teetered near a two-month high on 16 May following the latest US jobs print, which showed initial jobless claims in the US for the previous week fell slightly less than forecast – signs of resilience in the US labour market that garnered investor interest in the dollar.
Growing appetite for risk in markets inspired the increasingly risk-sensitive pound to a fresh two-month high a fraction below 1.27 against the safe-haven dollar the following day.
The pound dollar exchange rate wavered near this peak for several days before the UK’s latest consumer price index propelled it to 1.275 – another eight-week high – on 22 May. Both core and headline inflation cooled less than expected in April, with the latter easing from 3.2% to 2.3%, versus forecasts for a drop to 2.1%.
Moreover, the CPI revealed that UK service inflation, one of the BoE’s most closely watched inflation gauges, also cooled less than expected, printing at 5.9% rather than an expected reading of 5.4%.
The hotter-than-expected CPI report generated tailwinds for the pound as markets began trimming their interest rate cut bets for June.
The pound couldn’t cling to its gains amid robust US releases and news of slowing UK services activity, causing it to dip below 1.27 against the dollar. The latest US preliminary PMIs indicated ongoing resilience in the US economy after both the services and manufacturing sectors surprised to the upside in May.
The pound continued to falter on 24 May amid worse-than-forecast UK retail activity in April. Sales cratered to a four-month low, contracting by 2.4% and overshooting forecasts for a more modest 0.2% fall.
Meanwhile, the dollar was buoyed by hawkish Fed minutes, as central bank policymakers continue to push back against imminent monetary unwinding.
The pound traded near a two-month high of around 1.278 on 28 May after UK markets reopened following the Spring holiday.
The pound dollar exchange rate tumbled towards 1.27 on 29 May as the market mood deteriorated. Mounting pessimism allowed the safe-haven dollar to gain ground against the increasingly risk-sensitive pound.
A prolonged data lull in the UK brought shifting interest rate cut expectations into sharp focus for investors as May ended. The pound remained buoyant as investors trimmed their BoE interest rate cut bets amid the upcoming UK election, which takes precedence for the central bank.
The dollar also received support as markets continued to pare their Federal Reserve interest rate cut bets, before GDP data squeezed the US currency, helping the pound to edge away from the 1.27 benchmark. As expected, real GDP expanded at an annual rate of 1.3% in Q1, following the 1.6% growth recorded in the first estimate.
GBPUSD: 3-Month Chart
Looking ahead
While April saw a big drop in the UK’s headline rate of inflation, it did not cool as much as expected. Consequently, most investors do not expect an interest rate cut by the BoE at its policy meeting on 20 June. Despite this, the central bank’s rate rhetoric has gradually been getting more dovish recently.
Influential data from the UK economy in June: ILO Unemployment Rate (11 June), Consumer Price Index (19 June), Retail Sales (21 June), S&P Global/CIPS Services PMI (25 June), GDP (28 June).
The FOMC is expected to hold US interest rates steady at the conclusion of its next meeting on 12 June amid stalling disinflations. Although, the Fed is still expected to cut interest rates between one and three times in 2024. Investors will look for signals of policy loosening in the central bank’s accompanying statement.
Influential data from the US economy in June: ISM Manufacturing PMI (3 June), ADP Employment Change (5 June), Nonfarm Payrolls (7 June), Consumer Price Index (12 June), Producer Price Index (13 June), Michigan Consumer Sentiment Index (14 June), Retail Sales (18 June), Global Services PMI (21 June), GDP (27 June), Core Personal Consumption Expenditures (28 June).