The Pound to Dollar pair remained tepid at the start of last week, maintaining its course through the 1.31 range.
By Tuesday, however, rate-induced dollar strength had begun to weigh on the pound, causing it to drop to a three-week low.
The divergence in the policy outlook between the Federal Reserve (Fed) and the Bank of England (BoE) was exacerbated by central bank rhetoric throughout the week: Fed officials banged the drum for a more aggressive pace of tightening, while their BoE counterparts expressed caution about sustained hikes to curb soaring inflation.
This echoed the minutes from the Fed’s March meeting, which showed “many” Federal Open Market Committee (FOMC) members were prepared to raise interest rates in 50 basis-point increments.
The hawkish signals from the US caused the pound to nosedive below 1.30 against the dollar on Friday, trading at its lowest level since November 2020 amid a strengthening dollar – before settling above the resistance level over the weekend.
Economic indicators in focus for the pound
Following a quiet week in the UK economic calendar, a triumvirate of notable data sets – together with the dollar’s Fed-inspired rally – could dictate the pound’s performance.
Gross domestic product data on Monday will provide a three-month average to the end of February, so won’t consider the Russian invasion. The March reading was 1.1% for the quarter, but economists’ projections for the remainder of 2022 are downcast.
Data in March showed Britain’s unemployment rate dropped below its pre-pandemic rate in the three months to January – bolstering the BoE’s plans to hike interest rates. The April jobless print – released on Tuesday – is expected to edge one percentage point lower to 3.8%.
The UK’s consumer price index (CPI) is expected to rise again in March following an increase to 6.2% in the year to February – the fastest pace in 30 years – from 5.5% in January. Wednesday’s figures will help gauge if inflation remains on course to meet recent forecasts, with the BoE predicting consumer prices will peak at around 7.25% in April – almost four times the central bank’s 2% target.
Inflation data in focus for the dollar
The Fed’s hawkish stance brings Tuesday’s US CPI figures squarely into focus for investors in the dollar. The cost of living in the world’s largest economy is expected to have risen to an annualised 8.3% in March versus 7.9% in February – the fastest pace since 1981.
If an extra hawkish policy approach by the Fed is already priced in the market, a high CPI print in line with forecasts could be a non-event.
With markets closed on Friday for the Easter holiday, retail sales, consumer sentiment, and jobless claims data will round off the week for the dollar.
Tensions in Ukraine could continue to limit risk-on trading sentiment next week with Russian forces massing in the east of the country – potentially lending the safe-have dollar additional support.