GBP USD Loses Momentum as Dollar Strengthens

GBP USD Exchange Rate Feels Weight of 40 Year High Inflation

The pound’s surge against the dollar stalled on Monday, after hitting new highs last week amid rate hike expectations and softening fears about the economic impact of the Omicron coronavirus variant.

According to market analysts, the UK currency has firmed since mid-December, with the UK government’s response to Omicron providing a welcome boost to sentiment.

The government has focused on accelerating its booster vaccination programme – reaching more than 60% of the population to date – rather than returning to lockdown measures seen earlier in the pandemic that applied a vice-like grip on the economy.

Meanwhile, growing expectations that the Bank of England will raise interest rates as early as next month after a surprise hike in December have been reflected by investor bets for the pound.

British retailers enjoyed some festive cheer following months of Covid disruptions as sales during the Christmas shopping period beat pre-pandemic levels.

Data released by the British Retail Consortium overnight showed that UK retail sales rose 2.1% in December, bringing full-year growth to 9.9%. On a like-for-like basis, sales increased by 0.6% last month and 8.9% during 2021.

By this morning, GBP USD had steadied itself before rising to within a whisker of the 1.36 resistance level again.

Dollar higher on interest rate expectations

The dollar was also profiting from interest rate optimism as the new week dawned, climbing on Monday after last week’s soft jobs data stoked expectations of a hike in the US – with some market participants raising their estimates for how quickly the Federal Reserve will raise borrowing costs in 2022.

Traders have already been ramping up bets for rate rises this year following the release of the central bank’s minutes from its December meeting, which signalled an earlier-than-expected hike.

Looking ahead

Investors in the dollar will monitor inflation figures and testimony from Federal Reserve Chair Jerome Powell and Governor Lael Brainard this week for clues to the timing and pace of interest rate rises.

December US consumer inflation data is scheduled for Wednesday, with the headline consumer price index expected to come in at 7% year-on-year, enhancing the case for borrowing costs to rise sooner rather than later.

A clutch of influential data sets are scheduled for release from the UK economy on Friday: industrial production, manufacturing production and the latest gross domestic product reading.

A preliminary estimate of UK GDP for November is due today – a strong number should keep expectations alive for a further BoE rate hike in February.