As 2014 draws to a close, the Pound Sterling to US Dollar (GBP/USD) exchange rate is trending in the region of a 15-month low, having fallen to its lowest level of the year in December as a result of UK growth concerns and the expectation that the US Federal Reserve is moving closer to increasing interest rates.
Pound Sterling to US Dollar (GBP/USD) Exchange Rate Trends around 1.5500
The Pound Sterling to US Dollar exchange rate came under notable pressure in mid-December as the Federal Reserve delivered its latest policy statement.
The central bank finally altered its rhetoric regarding interest rates, removing the comment that borrowing costs will be on hold for a ‘considerable time’.
In its statement the Fed observed; ‘Based on its current assessment, the committee judges that it can be patient in beginning to normalise the stance of monetary policy. […] Labour market conditions improved further, with solid job gains and a lower unemployment rate. On balance, a range of labour market indicators suggests that underutilisation of labour resources continues to diminish. Household spending is rising moderately and business fixed investment remains slow. Inflation has continued to run below the committee’s longer-run objective, partly reflecting declines in energy prices.’
But the central bank went on to add; ‘However, if incoming information indicates faster progress toward the committee’s employment and inflation objectives than the committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.’
The announcement saw the US Dollar surge against several of its most traded currency counterparts and put pressure on the GBP/USD exchange rate.
Further declines in the Pound Sterling to US Dollar exchange rate were recorded after the US third quarter growth data was positively revised to show the fastest pace of expansion for a decade. The fact that the UK’s current account deficit widened also weighed on the Pound.
BoE to Leave Rates on Hold in 2015? Pound Sterling (GBP) Would Soften
While the UK’s economic growth is slowing, as evidenced by the negative adjustment to the nation’s annual Q3 figure, the US is improving.
The UK posted annual Q3 growth of 2.6% (down from the 3.0% initially forecast) while the US economy expanded at a rate of 5.0% – almost twice as much.
The disparity between the two nations has seen Bank of England (BoE) interest rate hike speculation fade and investors bet that the Federal Reserve could increase interest rates as early as next April.
If the Fed does indeed increase interest rates, it would give the US Dollar a notable boost.
Conversely, if the cooling of the UK’s housing market and deflationary concerns prevent the BoE from hiking borrowing costs in 2015, the Pound could come under serious strain.
Pound Sterling to US Dollar (GBP/USD) Exchange Rate Forecast
The GBP/USD exchange rate put on a stellar performance over the latter half of 2013 and the first half of 2014, steadily climbing from a low of 1.41 US Dollars per Pound to brush a high of 1.71 US Dollars per Pound.
Recent events have seen the Pound Sterling to US Dollar exchange rate preparing to close out 2014 trending in the region of 1.55 US Dollars per Pound.
A rate hike from the Fed and inaction from the BoE could see the Pound Sterling to US Dollar exchange rate plummet over the course of 2015.
If the first Fed rate adjustment comes in April, as projected, we forecast that the Pound Sterling to US Dollar (GBP/USD) exchange rate will fall to or below the 1.52 level.
