The pound remains indecisive against the US dollar as investors await fresh insights ahead of the release of US data. On Wednesday, the pound recovered after data showed that the UK economy returned to growth following a contraction in the second half of 2023.
The modest rise of the major pair is supported by the weaker USD. Nonetheless, the cautious market sentiment ahead of the release of US data could boost the greenback and cap any further upside of the GBP/USD pair.
Investors are cautious ahead of US data
During Thursday’s London session, the pound remained stuck in a range as market participants waited for further guidance on the Bank of England’s (BoE) next move on interest rates. The GBP/USD pair traded sideways as the market anticipates more clues on both central banks’ plans to start reducing interest rates.
UK economy is growing
The GBP/USD got a boost on Wednesday after the United Kingdom Office for National Statistics (ONS) reported that the growth in the monthly Gross Domestic Product (GDP), and the Manufacturing Production data for January came in as expected. On the other hand, the Industrial Production data was weaker than estimates. UK GDP increased 0.2% MoM in January from a 0.1% contraction in the second half of 2023. This suggests that the recession was shallow, and the economic outlook is improving.
BoE rate cuts
The pound’s direction will be determined by news about the timing of the Bank of England’s interest rate cuts. The easing of labour market conditions and cooling inflation have increased expectations for the BoE to cut interest rates in August. Economists at Rabobank are positive about the pound and expect the BoE to retain a steady policy until September. With expectations of the Fed and ECB to start cutting rates earlier than the BoE, sometime in June, and with the UK economic outlook improving, economists expect the pound to remain supported.
Fed rate cuts
In the near-term, the direction of the GBP/USD remains uncertain as stubborn US inflation data for February has increased concerns about a delay by the Fed to reduce interest rates. Currently, markets expect the Fed to start cutting interest rates in June.
Upcoming data to watch this week: Later on Thursday, the US Retail Sales report, Producer Price Index, and weekly Jobless Claims data will be closely watched. The US Retail Sales data for February could trigger volatility and could influence the Fed’s next move. The figure is expected to increase 0.8% MoM. A stronger-than-expected report could encourage the Fed to change to a less-dovish tone. According to the CME FedWatch Tool, Fed funds futures forecast a total of 71 basis points (bps) in rate cuts this year, which is less than the 95% anticipated at the beginning of the week. On Friday, the preliminary University of Michigan (UoM) Consumer Sentiment and Inflation Expectations data will also draw attention.