GBP USD Exchange Rate Climbs Higher but Growth Fears Remain

The pound recovered against the dollar on Thursday from news the previous day that inflation rose to a 40 year high in April – advancing back towards the two-week high of 1.249 it touched on Tuesday.

The UK currency was boosted on a day that saw the safe-haven dollar take a breather from Fed-fuelled gains. And without any data to trip it up – a common theme of late – the pound climbed back above the 1.24 benchmark into the midrange.

Even the murky domestic growth outlook couldn’t break its stride. However, this remains a concern for investors amid red-hot inflation that is inflicting pain on consumers.

Dollar slips on growth concerns

The dollar fell back on Thursday as concerns grew that aggressive tightening by the Federal Reserve and other global central banks could strangle growth.

Soft US housing data on Wednesday reinforced slowdown projections, with permits for future homebuilding falling to a five-month low last month, indicating the US housing market is easing.

Speaking on Wednesday evening, Federal Reserve Bank of Philadelphia head Patrick Harker echoed hawkish comments from Fed chief Jerome Powell the previous day.

Harker said he supports aggressive rate hikes at the central bank’s upcoming meetings as it attempts to rein in surging inflation.

“If there are no significant changes in the data in the coming weeks, I expect two additional 50-basis-point rate hikes in June and July,” Harker said. “After that, I anticipate a sequence of increases in the funds rate at a measured pace until we are confident that inflation is moving toward the (Federal Open Market) Committee’s inflation target.”

The dollar was dealt a further blow on Thursday when Labour Department data showed new claims for US unemployment benefits unexpectedly increased.

New jobless claims jumped 21,000 to a seasonally adjusted 218,000 during the week ended 13 May – the highest level since January. Economists had forecast 200,000 applications during the period.

The Philadelphia Federal Reserve also revealed that its gauge of regional manufacturing activity dropped sharply to 2.6 in May from 17.6 in April – its lowest level since the onset of the pandemic in early 2020.

Looking ahead

Investors in the pound await British consumer confidence figures on Thursday evening and retail sales data on Friday for fresh direction – both of which will shed light on how consumers are responding to rising prices and the subsequent squeeze on incomes.

Fed official Neel Kashkari is scheduled to speak on Thursday evening, and could provide his view on monetary policy.

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