Pound US Dollar (GBP/USD) Exchange Rate Weakens as UK GDP Forecasts Revised Lower
Confidence in the outlook of the UK economy deteriorated significantly in response to a surprise downward revision to the fourth quarter gross domestic product, leaving the Pound Sterling to US Dollar (GBP/USD) exchange rate on a weaker footing.
With a greater degree of data now available compared to the provisional reading the Office for National Statistics was prompted to lower its estimates, downgrading GDP growth from 0.5% to 0.4% on the quarter.
This did not encourage particular confidence in the underlying health of the UK economy, especially as consumer spending continued to weaken.
John Hawksworth, Chief Economist at PwC, noted:
‘The big picture has not changed. The UK economy is still estimated to have slowed markedly in the first half of 2017 as higher inflation – linked primarily to the weaker pound after the Brexit vote – dampened real household spending power. This factor continued to dampen consumer spending growth in the second half of 2017, but was offset by a stronger world economy, which boosted UK exports in areas like manufacturing and financial and business services.’
All in all, this seems to reduce the impetus for the Bank of England (BoE) to raise interest rates again imminently, to the detriment of GBP exchange rates.
US Dollar (USD) Demand Boosted as Fed Minutes Prove More Hawkish Than Forecast
The GBP/USD exchange rate also came under pressure on Thursday as a result of the Federal Open Market Committee’s (FOMC) January meeting minutes.
Investors were surprised to find that policymakers had taken a generally more hawkish view on monetary policy, with a number of officials reported to have raised their growth forecasts.
This encouraged bets that the Fed will raise interest rates four times over the course of 2018, rather than the three that markets have previously anticipated.
As a result, demand for the US Dollar (USD) strengthened significantly overnight, in spite of the more mixed nature of recent US data.
However, if this afternoon’s jobless claims data fails to show a further tightening of the US labour market this could knock some of the wind out of the sails of USD exchange rates.
Brexit Speculation Forecast to Weigh on GBP/USD Exchange Rate
Speculation over Brexit is likely to remain a major driving force for the GBP/USD exchange rate in the coming days, with markets still lacking clarity over the Conservative government’s approach to the issue.
As a hard-line group of Conservative MPs continue to push for the most drastic form of Brexit this raises the risk of the UK losing any advantageous access to the EU single market.
Given that the UK economy is already losing momentum the threat of a more pronounced break from the EU naturally puts additional pressure on the domestic outlook.
If there are any signs that Theresa May’s position on Brexit is hardening this could heavily weigh down the GBP/USD exchange rate, exacerbating fears for the future of the domestic economy.
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