The Pound to US Dollar exchange rate (GBP/USD) plunged below 1.6900 for the first time in seven weeks yesterday as investors reacted to the sturdy US GDP report. Demand for the ‘Greenback’ remained strong during the evening when the Federal Reserve cut asset purchases by -$10 billion and it emerged that one policymaker voted for an interest rate hike in July.
Sterling struck its highest level since June 11th yesterday afternoon in a knee-jerk reaction to the stronger-than-anticipated US GDP report. Traders were primed for a score of 3.0% but the actual report detailed a robust expansion of 4.0% in the second quarter. Additionally, the dismal first quarter contraction of -2.9% was positively revised to -2.1%.
Pound to US Dollar Exchange Rate Weakens
Strong rebounds in exports, inventories, business investment and consumer spending contributed to the encouraging 4.0% figure, which was seen to increase the probability of an earlier-than-expected Fed rate hike. GBP/USD weakened from 1.6940 to 1.6890 in response.
Bets that the US central bank will look to start raising interest rates sooner rather than later continued to swell during the evening when it was announced that Charles Plosser, of the Philadelphia Fed, voted for an interest rate hike this time out. Plosser said that there had been sufficient ‘economic progress’ to justify a tightening of monetary policy, and not just an end to the QE3 asset purchasing programme, which was tapered by -$10 billion to $25 billion and is expected to be wound down in October.
The rest of the FOMC report fell in line with economists’ forecasts: the dangers of lower inflation were seen to have ‘diminished’, the unemployment rate was seen to be less elevated but it was mentioned that significant slack still exists in the labour market.
It is difficult to tell whether any other FOMC policymakers will join Plosser in his dissent against the ultra-low 0.25% interest rate, but with economic growth flourishing and inflation running at a healthy pace there is every chance that bullish US Dollar traders could send GBP/USD down further over the coming weeks and months.
GBP to USD Forecast
From a technical perspective 1.6697 appears to be an important level of support for the Pound. If Sterling remains above 1.6700 then Bank of England rate hike bets could drive the Pound to US Dollar exchange rate higher. However, if GBP/USD falls below that level then it could signal an end to Sterling’s yearlong bull run.
The next potentially market moving data release for the pair is Friday morning’s UK manufacturing PMI report, which is predicted to print neutrally at 57.2.
However, the US Non-Farm payroll report on Friday afternoon could prove more decisive. It is anticipated that 231,000 new workers were added to the payroll during July. If the NFP reading beats the market consensus then it could drive GBP/USD even lower. If the labour market indicator disappoints then it could push the Pound back towards 1.7000.
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