GBP USD Exchange Rate Set for Second Weekly Gain

GBP USD Exchange Rate Slumps to Lowest Level in a Month

The pound was on course for a second weekly rise and closed in on a one-month high around the 1.266 mark against the dollar on Friday, having received a shot in the arm from Rishi Sunak the previous day.

The finance minister announced a substantial government spending package to support households, which is hoped will support the economy this year. This included a 25% windfall tax on oil and gas producers’ profits to help fund a £15 billion support package for British households that are feeling the pinch of soaring energy bills.

News of the government support, which largely aims to prop up lower-income households, improved sentiment towards the pound which has rebounded over the last two weeks versus the dollar after falling to a two-year low earlier in May.

The package could help negate the hit to real incomes from an expected energy bill rise in October, potentially prompting the Bank of England (BoE) to adjust its recent downbeat forecast for no growth for the rest of the year and a contraction in Q4 and next year.

If the UK central bank is encouraged to become more optimistic in its growth outlook – and the prospect of a recession is dulled – it could lift interest rates further than expected.

Dollar poised for biggest weekly drop in almost four months

The pound’s recent rally has also been fuelled by a broadly weaker dollar. And while the US currency ticked higher on Friday, it remained on track for its biggest weekly drop in almost four months.

Investors have reduced Federal Reserve rate hike expectations after the US central bank indicated it might slow or even pause its policy tightening cycle later this year.

Declining US treasury yields, soft data, and dovish comments by some Fed officials – including Atlanta Fed President Raphael Bostic this week – have blunted the dollar’s recent gains that were largely built on aggressive rate hike expectations.

The personal consumption expenditures (PCE) price index – a key gauge of US inflation – edged up just 0.2% last month, marking the smallest increase since November 2020 amid lower gas prices.

The rate of inflation over the past 12 months, based on the PCE, slowed to 6.3% in April from a 40-year high of 6.6% the previous month – the first decline in 18 months.

A narrower measure of inflation that discards volatile food and energy costs, known as the core PCE – which the Fed views as the most accurate measure of domestic inflation – increased in April by 0.3% for the third consecutive month.

Whether the surge in inflation starts abating soon remains to be seen, however, the Russian invasion of Ukraine has pushed up the price of oil and other commodities, while ongoing lockdowns in China have exacerbated supply-chain issues that triggered decades-high inflation.

The week ended on a sour note for the dollar after the University of Michigan’s gauge of consumer sentiment dropped to a final reading of 58.4 for May from the initial reading of 59.1 – its lowest level in over 10 years.

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