Two straight weeks of increases for GBP USD ended abruptly last week. The pair’s steady decline against the dollar was punctuated by significant activity on both sides of the Atlantic.
On Thursday, the Bank of England (BoE) pushed interest rates up by 50 basis points (bps) – the most significant hike in 27 years. Despite this acceleration, the UK central bank’s rate-hiking pace was slower than the Federal Reserve’s, making it hard for the pound to benefit from policy tightening.
The BoE’s gloomy economic forecast following the rate hike dented the pound, with the central bank warning that the UK will fall into recession this year and that inflation could hit 13% – a possible four-decade high.
The pound was dealt another blow on Friday by data showing US nonfarm payrolls increased by 528,000 jobs last month. The stronger-than-expected print reinforced the case for another supersized US rate hike.
The UK currency touched a 10-day low at 1.2004 just after the US jobs data was published.
GDP data in focus for the pound
With UK recession talk hanging heavy in the air following the BoE’s cautionary remarks about the current economic outlook, this week’s GDP release will carry even more weight. Investors are betting Friday’s print will show the economy shrank 0.1% over the last quarter and 1.1% in June.
A recession is defined as two consecutive quarters of negative growth, meaning the UK economy would shift into reverse if it also contracted in the third quarter.
The British Retail Consortium like-for-like retail sales print for July lands on Monday, which is forecast to show a fourth consecutive fall in shop sales as soaring inflation continues to squeeze the spending power of consumers.
Inflation data in focus for the dollar
US inflation data published on Thursday could strengthen the case for the Fed to hike interest rates by 75 bps for the third consecutive month if it comes in hotter than anticipated.
Wednesday’s consumer price index (CPI) figure will likely show the annual rate of inflation – which remains more than three times higher than the central bank’s 2% target – to moderate to 8.7% in July from 9.1% in June.
However, core CPI indicates a jump of 0.5% month-over-month, lifting the annual inflation rate to 6.1% from 5.9% in June.
The Producer price index for July hits the headlines on Thursday, together with the weekly initial jobless claims report, while the University of Michigan consumer sentiment index will release on Friday.
Chicago Fed President Charles Evans, Minneapolis Fed President Neel Kashkari and San Francisco Fed President Mary Daly have speaking engagements across the week. Their comments will be closely watched to assess the probability of a third straight 75 bps rate hike next month.
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