GBP/USD Going down?
Dollar didn't drop versus the GBP even though risk environment improved!!
If the dollar tends to do well when the risk environment is negative we should have seen a sell off in the last weeks considering the Vix has fallen together with oil and rates pressure has subsided.
So I wanted to take a different approach and let the data decide whats going on with GBP/USD
Using a macro framework that scores currencies across growth, rates, inflation, labour markets, external balances, fiscal risk, capital flows, sentiment and domestic activity, the conclusion was surprisingly clear:
The Dollar enjoys broad-based macro support. Sterling does not.
The first reason is growth momentum.
The US continues to outperform, supported by indicators such as the Weekly Economic Index and broader activity measures. The UK growth picture is positive, but considerably less compelling.
The second reason is rates and inflation.
Both currencies receive support from higher rates, but the US scores materially better. The Dollar benefits from a stronger inflation and pricing backdrop, while Sterling's support from rates isn't large enough to offset weakness elsewhere.
The third and perhaps most important structural difference is the external balance.
The UK scores poorly across:
❌ Goods imports
❌ Total imports
❌ Goods trade balance
❌ Non-EU goods trade balance
❌ Overall balance of trade
These factors create the largest gap between USD and GBP in the model.
By contrast, the US external position is modestly positive, helped by stronger export dynamics.
The fourth major divergence is sentiment.
The US receives a strong positive contribution from consumer and business sentiment indicators.
The UK is being dragged down by:
📉 Services PMI
📉 Consumer confidence
📉 Business confidence
📉 Composite PMI
The result is a significant sentiment advantage for the Dollar.
Even the labour market favours the US.
American labour indicators remain supportive overall, while UK labour signals have turned negative.
To be fair, Sterling isn't without positives.
✅ Rates and inflation
✅ Credit and money indicators
✅ Commodity exposure
All provide support.
The problem is that these positives are overwhelmed by:
❌ Slower growth momentum
❌ Weak external balances
❌ Soft sentiment
❌ Deteriorating labour indicators
The takeaway?
Currencies are rarely driven by a single factor.
Sterling has some attractive characteristics, but the Dollar currently has support across more of the macro landscape.
Based purely on this framework:
➡️ USD = stronger growth + stronger rates + broader macro support
➡️ GBP = narrower support with significant structural drags
For now, the path of least resistance still appears to favour the Dollar.
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