The pound sunk to a two-year low against the dollar on Tuesday after data showed the jobless rate in Britain rose for the first time since late 2020 in the three months to April.
By Thursday, GBP USD pared its losses and climbed to a one-week high on expectations of aggressive policy tightening by the Bank of England (BoE) over the next few meetings.
The UK central bank on Thursday raised interest rates by a quarter of a percentage point before warning that inflation would heat up to a fresh 40-year high of 11%. Investors took this as a signal that policymakers will need to act decisively this summer to cool prices.
The pound’s rally from the 1.19 range to within a touching distance of 1.24 happened in wake of the Federal Reserve’s own policy announcement on Wednesday with the US central bank delivering its biggest hike since 1994.
Inflation data in focus for the pound
Inflation data on Wednesday is the highlight of a busy week in the UK economic calendar. Spiralling consumer prices reached a new four-decade high above 9% in May.
The inflation outlook highlights the challenge facing the BoE as it ponders faster rate rises in response.
Friday’s retail sales print will also be on investors’ radar. This will indicate how surging inflation is impacting consumer spending. Economists expect that sales contracted 0.9% month-on-month in May, down from the 1.4% growth registered the previous month.
Several BoE officials have speaking engagements scheduled on Monday and Tuesday before the services sector PMI hits the headlines on Thursday.
Powell testimony in focus for the dollar
Federal Reserve chief Jerome Powell provides his biannual report on monetary policy before lawmakers on Capitol Hill on Wednesday and Thursday, just days after the central bank delivered another aggressive rate hike.
Powell is expected to echo the Fed’s commitment to taming inflation, which is running at its hottest in 40 years.
On Friday, the Fed said its willingness to fight inflation is “unconditional” after annual domestic inflation increased at the fastest pace since 1981 in May.
Investors are concerned that the Fed’s aggressive rate hike path risks dragging the economy into recession. Therefore, Powell could be grilled for more information on how the central bank can quell inflation.
A data light week in the US calendar means updates on the health of the housing sector will grab investor attention. A print on Tuesday on existing home sales is expected to show a slowdown in May as mortgage rates continue to rise. New home sales figures on Friday are forecast to record a bounce following May’s 16.6% plunge.
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