Pound edges higher after soft US GDP

The British is in positive territory on Thursday. In the North American session, GBP/USD is trading at 1.2492, up 0.23%.

US GDP slows to 1.6%

Is the US economy finally slowing down? Recent key indicators, from nonfarm payrolls to consumer inflation have been stronger than expected, but the markets could hear the “thud” of today’s initial GDP for the first quarter, which at 1.6% y/y missed the market estimate of 2.5% and was sharply lower the Q4 2023 reading of 3.4%. Consumer spending slipped to 2.5%, down from 3.4% in Q 2023.

Meanwhile, there was bad news on the inflation front, as the personal expenditures price index (PCE), which is considered the Fed’s preferred inflation gauge, jumped 3.4% y/y in the first quarter, up sharply from 1.8% in the fourth quarter and its largest gain in a year. Core PCE, which excludes food and energy, rose 3.7%, above the market estimate of 3% and crushing the fourth quarter gain of 2%.

Today’s report is a discouraging sign for the Fed, as growth was lower than anticipated and inflation was higher than expected. The rise in inflation shouldn’t come as a major surprise though, as consumer inflation has risen in the past two releases.

The markets reacted negatively to the news, with investors now pricing in just one rate cut in 2024, according to the CME FedWatch tool. Market expectations for a rate cut have fizzled since January, when the markets were exuberantly pricing in up five or six rate cuts during the year. A rate hike, which would have been unthinkable at the start of the year, is a real possibility if the economy remains in good shape and inflation continues to rise – the options markets have priced in a 20% probability of a rate hike within the next 12 months.

GBP/USD Technical

• GBP/USD tested support at 1.2458 lower. Below, there is support at 1.2412
• There is resistance at 1.2544 and 1.2590

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