After a modest uptick in the second quarter UK gross domestic product, which rose from 0.2% to 0.3% on the quarter, the Pound trended higher across the board.
There was some relief that the growth data had not surprised to the downside, even though its improvement remained distinctly fragile in nature.
However, as this was a preliminary reading based on only some of the data for the second quarter the potential for a downwards revision cannot be ruled out.
Analysts at ING noted:
‘The latest growth data has dashed any hope that momentum would return after a particularly soft start to the year. Admittedly, the performance of the all-important service sector could have been worse: Warm weather and a late Easter helped retailers sell their summer wares. But this is likely to prove temporary and, as real wages continue to fall, the household spending squeeze will continue to intensify.’
As the Bank of England (BoE) looks set to maintain a relatively cautious outlook at its August policy meeting, and likely throughout the remainder of the year, the upside potential of GBP exchange rates is somewhat limited.
Even so, if the Monetary Policy Committee (MPC) shows increasing signs of a split on monetary policy this could offer support to the Pound.
Any greater shift towards hawkishness would be a positive development for the Pound US Dollar exchange rate, even if the odds of any imminent interest rate hike remain rather slim at this juncture.
US Dollar Trends Lower as Odds of Another Fed Rate Hike Diminish
Confidence in the US Dollar soured significantly in the wake of the Federal Open Market Committee’s (FOMC) July policy meeting.
Policymakers sounded a distinctly cautious note on the subject of inflation, prompting the likelihood of a third 2017 interest rate hike to diminish sharply.
This encouraged investors to sell out of the ‘Greenback’, with the mixed nature of recent US data having already undermined confidence in the underlying health of the world’s largest economy.
Even so, the US Dollar could find a rallying point if June’s durable goods orders and advance goods trade balance figures prove positive.
Signs that consumer confidence is holding up could weigh heavily on the GBP USD exchange rate, although in the absence of a greater uptick in inflationary pressure any ‘Greenback’ rally could prove limited.
Political jitters could equally hamper demand for the US Dollar in the near term, with investors still largely unconvinced that the Trump administration can deliver on its promised infrastructure investment and tax reforms.
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