GBP/USD Faces Decline Amidst Strong US Economic Data and Hawkish Fed Stance

The GBP/USD pair persists in its downturn that initiated on September 20, registering figures beneath the 1.2150 mark during Wednesday’s Asian trading window. Recent encouraging economic figures from the US amplify the ongoing strain on this currency duo.

The Consumer Confidence Index for the US unveiled on Tuesday for September, witnessed a dip to 103.0 from its preceding August value of 108.7. Concurrently, August’s Building Permits exhibited an uptick, arriving at 1.541M from the earlier 1.443 M.

In terms of the monthly House Price Index for July, there was a surge to 0.8%, surpassing the anticipated market forecast of 0.5% and outperforming the previous rate set at 0.4%.

The Federal Reserve’s (Fed) firm outlook on the direction of interest rates continually propels US Treasury yields, favouring the US Dollar (USD) in the process. Currently, the 10-year US Treasury note’s yield is on a slight pullback from its peak, not seen since October 2007, settling around 4.51%.

Market participants eagerly anticipate Wednesday’s disclosure of the US Durable Goods Orders report. Set for release on Friday is the Core Personal Consumption Expenditure (PCE) Price Index, the Fed’s choice gauge for consumer inflation. Projections indicate a potential drop in the annual rate from 4.2% to 3.9%.

By the current reporting period, the US Dollar Index (DXY) is hovering approximately at 106.30, a zenith not observed since the previous December.

Neel Kashkari, the Minnesota Fed President, articulated on Tuesday the necessity for an additional rate escalation, succeeded by a sustained period at that rate. He alluded to the prospective attainment of an economic soft landing, denoting a moderated deceleration without triggering a recession.
Of late, diverse viewpoints concerning monetary policy have emerged from Federal Reserve officials.

While some advocate for a cautious approach, others, like Fed Governor Bowman, underline the urgency for a subsequent rate augmentation.

In light of the recent “dot plots” revealed in the September Summary of Economic Projections (SEP), the forecast from the Fed indicates a potential 25 basis point (bps) rate enhancement by year’s end.

Moreover, expectations are set for maintaining rates above the 5% mark throughout the succeeding year.

From the UK’s perspective, in the absence of fresh economic insights, the market’s focus remains on the Bank of England’s (BoE) latest resolution, which was largely interpreted as dovish. This interpretation was largely shaped by an inflation report signifying waning inflationary trends.

Nevertheless, the UK’s recent economic metrics, particularly the softer retail sales and PMIs, have reignited apprehensions about an imminent recession. The forthcoming release of the UK’s Gross Domestic Product (GDP) data on Friday, expected to remain stable, is keenly awaited.