GBP USD Exchange Rate Hits Three-Week High

GBP USD Exchange Rate Continues to Pull Away from March 2020 Low 

The pound touched its highest level (1.2617) in three weeks against the dollar on Thursday, as investors awaited further details on the government’s response to the cost-of-living squeeze – and its potential to support the economy in the short term.

Mounting fears that the domestic economy is tumbling towards recession have dented the pound’s appeal recently. According to market analysts, any signs of government support could improve sentiment toward the UK currency, which has been on the up over the last two weeks following a torrid period.

As expected, Chancellor Rishi Sunak announced a windfall tax on energy companies and £15 billion of additional support for households in a cost-of-living statement in the Commons on Thursday.

Sunak said the provisions would provide “significant support for the British people”, with inflation at a decades-high and energy bills set to continue soaring.

They should also ease pressure on the Bank of England, which must strike a balance between hiking interest rates to cool inflation and keeping a close eye on the deteriorating growth outlook.

US economy contracts by 1.5% in first quarter

The dollar continued to slip lower on Thursday following minutes on Wednesday from the Federal Reserve’s May meeting that sprung few surprises, with most rate-setters preferring additional 50 basis point rate hikes “at the next couple of meetings”.

Earlier in May, the US central bank raised its benchmark interest rate by 0.5 percentage points – the biggest hike in over 20 years – and indicated that it would persist at that pace at its next two meetings to contain inflation.

The dollar was dealt a further blow on Thursday by data showing the domestic economy contracted in the first three months of the year, despite a consistent pace of spending by consumers and businesses.

According to the Commerce Department, the US economy shrank at a 1.5% annual pace in Q1 – a downward revision of 0.1% from its first estimate last month. This represented the first fall in gross domestic product (GDP) since Q2 2020 – during the Covid-19 recession – and followed a strong 6.9% expansion in Q4 last year.

The gloomy GDP estimate was softened slightly by data showing applications for US unemployment insurance fell last week by more than forecast, underscoring a tight labour market.

Initial jobless claims decreased by 8,000 to 210,000 in the week ended 21 May, the Labour Department reported on Thursday.

Looking ahead

Another barren day in the UK economic calendar on Friday means US data sets will be in full focus for investors, with the core personal consumption expenditures price index and personal spending numbers hitting the headlines.

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