Pound-to-Dollar Forecast: GBP/USD Drops on Bullish Greenback Momentum

The Pound US Dollar (GBP/USD) exchange rate weakened through Thursday’s European session, despite Pound (GBP) strength in other Sterling exchange rates. US Dollar (USD) investors were hopeful that the US economy had grown in the third quarter of 2023; bullish investor sentiment boosted the ‘Greenback’ against its peers.

At the time of writing, GBP/USD is trading at $1.2111, having fallen approximately 0.15% on the day.

US Dollar (USD) Exchange Rates Enjoy Positive Economic Outlook

The US Dollar trended higher through Thursday’s European morning, as expectations of strong third-quarter growth in the US economy lent the currency a boost.

Following the release of the data, markets were further impressed as growth exceeded already-optimistic expectations, printing at 4.9% from 2.1% in Q2. The economy’s sudden burst of strength is likely to put pressure on the Federal Reserve to continue with inflation-quashing measures.

Marking the largest jump in economic expansion since the last quarter of 2021, analysts reflect that consumer spending on everything from cars to concert tickets and restaurant meals will have helped buoy the figures, while business spending likewise increased as companies acquired new factories and other buildings.

Moreover, US spending also rose at state and local government level – despite the restrictive impact of high-interest rates.

Perhaps tempering USD gains somewhat are mixed data in other quarters. While strong economic growth signals that the economy can withstand further interest rate hikes, the latest quarterly core PCE data dropped from 3.7% to 2.4%, indicating that further interest rate hikes may not be necessary.

Moreover, forecasts regarding the onward trajectory of economic growth posit that GDP will drop back down as consumers rein in spending and a lacklustre property market weighs upon growth. The economic commentary is mixed, however. Striking a hawkish tone in a discussion last week, Fed chair Powell said:

‘Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.’

Pound (GBP) Exchange Rates Regain Losses on Tentative Optimism

The Pound regained ground against several peers on Thursday, despite mixed economic data. Printing far below expectations at –36, the latest retail sales indicator from the Confederation of British Industry (CBI) revealed the impact of restrictive living costs on UK spending.

Nevertheless, forecasts of waning inflation ahead appeared to have a more positive impact upon Sterling exchange rates. According to the latest consumer expectations survey from Citi/YouGov, the public's expectations for year-ahead inflation continued to ease in September from 4.4% to 4.2%.

Expectations of softening price pressures are a huge relief for households struggling with the cost-of-living and simultaneously open the door to a pickup in economic growth. Citi economist Benjamin Nabarro writes:

‘For now, these data continue to show UK inflation expectations to be relatively well-anchored. We also expect these data to continue to ease in the months ahead as headline inflation falls back.’

While a hold in monetary policy tightening measures from the Bank of England (BoE) may trigger monetary policy divergence between the UK’s central bank and other major banks such as the Federal Reserve and the European Central Bank (ECB), it could help to avoid a recession, as higher interest rates would inevitably stifle spending.

GBP/USD Forecast: Exchange Rate to Fluctuate as Markets Digest Data?

The GBP/USD exchange rate may experience some volatility today as markets and economists digest the considerable clutch of US data just released.

Investors have responded instinctively to strong GDP data and begin to consider the country’s PCE price index; yet to be analysed are a pickup in initial jobless claims for the week ending 21 October and recent retail data. Together, the volley of releases paints a mixed picture, potentially capping USD gains ahead.

Speeches from the Fed’s Christopher Waller and the BoE’s Jon Cunliffe may also influence exchange rates depending upon whether the tone struck by either is hawkish or dovish; subsequently, the US monthly PCE index is likely to inspire movement today.

On the UK front, a lack of significant data leaves the currency exposed to losses. Nevertheless, risk-on market sentiment or hawkish indications from the BoE could yet propel GBP higher.