GBP/USD Exchange Rate: Will the Fed’s Latest Decision See Pair Shed Its Gains?

GBP/USD Exchange Rate Keeps Recovering from Covid Woes.

The Pound US Dollar (GBP/USD) exchange rate has made some gains today as Sterling recovers from the shock of lifting restrictions, buoyed by an upbeat outlook on the UK economy.

Today, the EY Item Club – a leading economic forecaster – has said that the UK economy is growing at its fastest rate in 80 years. Paired with last week’s data from the UK, which was mainly positive, confidence in the UK economy is high.

In addition, the initial shock of the UK’s ‘freedom day’ appears to have subsided, and the potential benefits of the lifting of lockdown restrictions seem to be cheering GBP investors.

With UK Covid cases falling for five days straight, many are hopeful that the government’s gamble is paying off.

However, the data are unlikely to show the impact of removing restrictions until the end of this week. If cases, hospitalisations and deaths begin to rise again, we could see a sharp turnaround in GBP/USD.

Economic reports from the UK are sparse this week, so the two key releases could have big effects.

The Confederation of British Industry’s distributive trades survey is predicted to show that the volume of UK retail sales dropped this month but still remains around the highest levels in three years. If the report comes in as forecast – or beats expectations, like last month’s did – then this could boost the Pound.

Also keep an eye out for the consumer credit figure for June, which is expected to rise from £0.28bn to £0.6bn. Such an increase would indicate that UK consumers are confident in the UK’s economic recovery and are borrowing more to spend more, further driving economic growth. Again, Sterling could climb.

However, the small number of UK releases versus the many market-moving events coming from the US may mean that the US Dollar will come out on top.

Will the US Dollar (USD) be Boosted by a Hawkish Fed?

The US Dollar (USD), meanwhile, has been somewhat subdued today amid a lack of data and a slight shift in global risk appetite.

USD investors will be looking to the US durable goods orders tomorrow for fresh impetus. Orders are expected to have increased again by 2.1%, which could give the ‘Greenback’ a boost.

But the biggest event of the week will be the Federal Reserve’s interest rate decision on Wednesday.

The US Dollar has enjoyed an elevated position ever since the Fed struck a more hawkish tone back in mid June, and since then inflation has continued to rise.

Last month’s inflation rate hit 5.4%, beating expectations and rising for the fifth consecutive month to reach its highest level since August 2008.

As such, some investors will be hoping for more hawkishness from the Fed. With raised expectations, whatever the Fed announces is likely to have a big impact on USD exchange rates.

The ‘Greenback’ could find further support as the week goes on, as quarter-on-quarter GDP growth is expected to expand by 8.6%.

Meanwhile, initial jobless claims are expected to drop and personal spending is forecast to rise, both of which could boost the US Dollar.

By Samuel Birnie

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