GBP fails to launch on improved GDP

Even though Friday’s UK GDP data was better than expected across the board, Sterling is still in the doldrums. Economic growth in the month of September was 0.2%, bringing the annualised growth up to 0.6% when the markets had expected 0.5%, and in the three months to September, the economy produced zero growth, which was better than the market forecast of a contraction of 0.1%. The thing that is stopping sterling from strengthening appears to be this week’s UK consumer price inflation data, which is forecast to reflect a slowdown in the pace of price rises to something like 4.8%, down from 6.7% last time around. However, that isn’t the only UK data this week. Tuesday brings the employment data, which is likely to show a small reduction in the unemployment rate and Friday will see the release of retail sales data for October, which is expected to be stronger than the 0.9% contraction we saw in September. As the Bank of England’s core purpose is to get inflation back to its 2% target, it makes sense that the inflation data will be the most significant GBP mover and a big reduction in the pace of inflation should kill any chance of further interest rate hikes in the UK and will start tongues wagging about the date of the first interest rate reduction in 2024. That outcome ought to weaken the pound, so be prepared if you’re a sterling seller. As at this morning, in the interbank market, a pound will buy you USD 1.2240 and EUR 1.1440. Both rates are a little down on last week’s highs.

USD poised ahead of inflation data

Inflation data of both the producer and consumer variety will be the driving force for the US dollar this week unless external events contribute to the volatility. The Federal Reserve will be on standby for tomorrow’s consumer price inflation index although the markets aren’t expecting any substantial change to the previous 3.7%. If the forecasts are correct and US inflation is actually flattening out, it raises the prospects of earlier interest rate cuts in the US and that may well weaken the US dollar. There is a chance that the Produce Price Inflation Data will be softer still, adding to the pressure on the Fed to ease the cost of borrowing. Right now, the US dollar is trading at $1.2240 against sterling and $1.0690 against the euro. These are both within recent ranges.