GBP USD Exchange Rate: The Week Ahead January 24th

GBP USD Exchange Rate Poised for Central Bank Rate Decisions

The pound broadly weakened against the dollar throughout last week, starting a fraction below the 1.37 resistance level on Monday and ending up in the 1.35 mid-range – its lowest level in more than a week.

Data on Wednesday showing consumer prices jumped to their highest since 1992 turned up the pressure on the Bank of England (BoE) to hike interest rates next month to curb red-hot inflation.

However, soft UK retail sales figures for the Christmas shopping period alongside US Treasury yield inspired dollar strength combined to weigh the pound down.

Interest rate expectations and Sue Gray inquiry in focus for the pound

The week begins with the release of a heavyweight data set for the pound: the UK Markit services purchasing managers’ index for January – in what is an otherwise quiet few days in the UK’s economic calendar.

The signs are good for the UK currency, with the gauge of the economic situation in the UK’s powerhouse services industry forecast to rise from 53.6 in December to 55 – a reading above 50 indicates expansion in the sector.

The pound’s narrative has been dictated by interest rate speculation in 2022 after the BoE became one of the first major central banks to raise borrowing costs following the pandemic. Investors will be eager for clues this week about its appetite for further monetary policy tightening in February, amid soaring inflation.

The pound appears to have shrugged off uncertainty surrounding Boris Johnson’s premiership, despite the sharpening of knives within his own party in the wake of ‘partygate’. Mounting political pressure has so far not bled into currency markets, with little evidence that they are bracing for a shock departure – but all that could change this week.

Senior civil servant Sue Gray has been investigating the series of parties allegedly held in Downing Street during lockdown – and Prime Minister Boris Johnson says the report will be published this week.

Westminster is holding its breath for the report’s conclusion. If there is evidence Mr Johnson has breached the Ministerial Code – such as potentially misleading parliament – calls will intensify for him to step down.

Fed monthly meeting in focus for the dollar

All roads for the dollar lead to Wednesday’s Federal Reserve meeting when central bank rate-setters will provide more clarity on the outlook for borrowing costs – and the potential pace of change.

US Treasury yields – and the dollar – rose last week on the back of expectations that the Fed will tighten monetary policy at a faster pace than previously expected.

Investors are placing bets on up to four rate hikes this year, starting in March, and expect the Fed to start winding down its $8 trillion-plus balance sheet in the foreseeable future.

It’s another busy day in the US on Thursday when a slew of influential data sets hit the headlines, including initial jobless claims for the week ended 21 January, durable goods orders and the gross domestic product reading for the fourth quarter – which is expected to surge to 5.6% from 2.3% in Q3.

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