- Odds of 2016 Fed rate hike boosted by robust payrolls report – Higher market pricing of imminent monetary tightening boosts US Dollar
- BoE loosening dented GBP USD exchange rate – Brexit-based worries expected to maintain pressure on Pound
- UK ecostats unlikely to offer substantial Sterling support – Further signs of slowdown probable
- Retail and inflation data could boost USD further with encouragement for September tightening – Disappointment likely to undermine ‘Greenback’ demand
BoE Commentary Raises Odds of Further Monetary Loosening
Comments from Bank of England (BoE) policymaker Ian McCafferty helped to spur the Pound lower against rivals, reinforcing the bearish bias of the GBP USD exchange rate. McCafferty’s suggestion that interest rates could be cut further before the end of the year was particularly notable considering that he is generally rated as the most hawkish member of the Monetary Policy Committee (MPC). As a result the GBP USD currency pair was slumped in the region of 1.2964 on Tuesday afternoon.
(Previously updated at 3:59 on 08/08/2016)
Speculation over the policy outlook of the Federal Reserve is likely to remain the dominant influence on the Pound to US Dollar exchange rate in the coming days, with Sterling remaining under pressure following the BoE’s rate cut.
US Dollar Biased to the Upside after Strong July Payrolls Report
Following Friday’s stronger-than-expected Non-Farm Payrolls report the Pound to US Dollar (GBP USD) exchange rate has trended sharply lower. In the wake of the higher headline figure markets have been inclined to indulge in fresh speculation over the chances of the Federal Reserve resuming its monetary tightening cycle before the end of the year. However, as Danske Bank senior analyst Mikael Olai Milhøj noted:
‘Although it is good news that employment growth has rebounded sharply after the two weak jobs reports in April and May, employment growth has levelled off this year compared with the past couple of years. On average, employment growth has been 190,000 per month this year compared with 230,000 in 2015 and 250,000 in 2014.’
Given that the Federal Open Market Committee (FOMC) has stressed in recent meetings the importance of global economic factors, the impact of bullish domestic data seems likely to be somewhat limited. Worries over negative headwinds from China and Brexit-based uncertainty seem set to keep the Fed from adopting an overly hawkish view on policy this year, particularly with the domestic presidential election also clouding the outlook. To that end Milhøj further noted:
‘As we have argued for some time, most voting FOMC members have a dovish-to-neutral stance on monetary policy and would rather postpone the second hike than hike prematurely. The Fed can afford to stay patient as PCE core inflation is still below 2%, inflation expectations (both survey based and market based) have fallen and wage inflation is still subdued.’
Bank of England Easing Predicted to Weigh on Pound (GBP) in Absence of Positive Data
The Pound (GBP), meanwhile, is likely to remain biased to the downside over the long term due to the negative influence of post-Brexit uncertainty on the UK economy. Economic data gathered in the aftermath of the EU referendum has proven decidedly discouraging, with shockingly weak PMIs having been the impetus behind the Bank of England’s (BoE) decision to cut interest rates at its August policy meeting. This decision is expected to weigh on Sterling for some time to come, as Tim Riddell of Westpac commented:
‘Though markets had priced in a 25bp cut with a partial expansion of the APP, the greater (total of GBP70bn) APP increase as well as a clear indication that the bank rate could head towards zero (backed by a new scheme to ensure transmission of the cut), if data adheres to their new forecasts, will continue to weigh on GBP.’
While the BoE’s monetary loosening has set the GBP USD exchange rate on a bearish trend once the impact of the easing measures begin to filter through into the real economy the implications should be more positive. However, as economic data will not reflect the impact of the interest rate cut and quantitative easing program for some time the softness of the Pound is likely to persist. In the meantime, pre-Brexit data is unlikely to shore up the GBP USD exchange rate, as consequent events have rendered the figures somewhat moot.
GBP USD Exchange Rate Forecast: US Retail Sales and Inflation to Influence Odds of Fed Rate Hike
In the nearer term US data is expected to have the greater material impact on the GBP USD currency pair, with investors keen to gauge the possibility of the Fed choosing to pull the trigger on interest rates before the end of the year. Strong enough figures could encourage greater pricing for a September rate hike, which would boost the US Dollar further against rivals. If the upcoming Advance Retail Sales, University of Michigan Confidence Index and Consumer Price Index results prove disappointing, though, the GBP USD exchange rate would have scope to regain some of its recent losses.
Current GBP, USD Exchange Rates
At the time of writing, the Pound to US Dollar (GBP USD) exchange rate was slumped in the region of 1.3035, while the US Dollar to Pound (USD GBP) pairing was making gains around 0.7671.
Comments are closed.