One of the strongest world currencies, the British pound, is having tough competition with the US dollar which is gaining more and more supporters. On Wednesday, the pound sterling declined at first but then slightly recovered against the US dollar in the course of the session.
Apparently, market participants are cautious about buying the pound ahead of the GDP data release in the UK.
At the moment of writing, GBP/USD was trading near the level of 1.3853. It is not easy for the sterling to compete with the greenback which continues to gain ground against its main competitors on Wednesday.
Investors rushed to buy the US dollar as they expect the Fed to start cutting the QE program as soon as this September. According to the world's leading media, mass vaccination of the US population contributes to a rapid recovery of the US economy. In addition, strong data on employment in the United States that was released last week support the assumption that the US regulator will soon tighten its monetary policy.
Earlier, Jerome Powell, the chair of the Federal Reserve, refused to recognize high inflation as a serious factor. He insisted that it would not last long. Powell thinks that it is relevant to change the monetary policy only in order to help the US labor market recover to pre-pandemic levels. Now that employment situation in the country has considerably improved, Fed officials are unlikely to avoid these two main factors. Obviously, investors are also aware of this fact.
So, it is hardly surprising that the greenback gained confidence and moved notably higher against six other currencies. After a significant strengthening on Friday, the US dollar index continued to rise on Wednesday and even reached a high of 93.16 that was last seen in July. However, at the moment of writing, the index slipped to the area of 92.92. Meanwhile, the US Treasury yields have been posting gains for six consecutive sessions.
Today, the US Bureau of Labor Statistics will release important report on the US Consumer Price Index (CPI) for July. The indicator is forecast to rise by 5.3% compared to the same period last year, which is slightly below 5.4% registered in June. By the way, the CPI for June was the highest one. Stronger data on US inflation will be a signal for the Fed to start to roll back its stimulus programs ahead of time. Robust economic data is unlikely to keep the dollar at its peak levels for a long time. Yet, in the short term, it will definitely support the dollar's uptrend. If CPI is below the forecast, then depreciation of the US dollar and the yields of the US Treasuries may turn out to be stronger than the upward risks.
Today, the pound has also declined against the euro and then advanced by 0.05%. At the time of writing, it was trading at the level of 84.63. Yesterday was a much better day for the British currency as GBP rose to the highest level against EUR since last February. The reason for this was the fact that investors expected the UK regulator to increase interest rates much earlier than the ECB.
The lifting of most social restrictions by the UK government gave a boost to the pound which is why it has notably appreciated in recent weeks.
Currently, traders still refrain from buying the sterling as they are waiting for the release of the UK GDP data for the second quarter of 2021. The report will be available on Thursday. GDP is considered an important indicator of the general state of the country's economy. If the GDP indicator is growing, this serves as a strong supporting factor for the national currency. According to the preliminary forecasts, UK GDP growth for Q2 will amount to 4.8% (+ 22.1% on an annual basis) after falling by -1.6% (-6.1% on an annual basis) in the first quarter of 2021.
If the GDP data in the UK turns out to be worse than expected, the pound will bear significant losses. In this case, the GBP/USD pair will lose its support and will remain under significant pressure from the rapidly rising US dollar. On the other hand, strong GDP figures will provide solid support to the pound sterling. However, it is difficult to say whether this factor will be important enough and how strong the upward momentum will be for the GBP/USD pair.
