The near-term outlook for the GBP USD exchange rate remains predominantly negative, with markets increasingly pricing in a rate hike from the Federal Reserve in December and US tax reform picking up speed.
US Core Inflation Increases, Rate Hike Expectations Rise, USD Exchange Rate Outlook Bolstered
Whilst demand for the ‘Greenback’ fell on Thursday, the near-term outlook for the US Dollar is largely positive, bolstered by two consecutive GDP prints of 3.0%, a pickup in core inflation levels, an unexpected gain in retail sales and historically low unemployment.
The US inflation figure, excluding food and energy, demonstrated a year-on-year rise in October to 1.8%, up from 1.7% previously.
This was the first time that this reading has accelerated annually since January, with the overall cost of living rising as forecast.
Beyond this, unemployment in the US remains at historic lows, having dropped to 4.1% in November.
Combined, the stage seems set for a third and final Federal Reserve rate hike in 2017.
Russell Price, Senior Economist at Ameriprise Financial Inc asserted that the readings are ‘a reflection on the fairly solid economic environment we’re currently enjoying’ continuing:
‘Inflation is moving closer to the Fed’s target on the core. A December rate hike seems fairly certain, and justifiable, and the outlook for consumer spending looks good’.
Because of this outlook the GBP USD exchange rate will likely come under increasing pressure moving into December, with the combined possibility of US tax reform liable to further cement the ‘Greenback’s’ lead into 2018.
Trump Tax Vote Imminent – Volatility Ahead for GBP USD
US President Donald Trump is scheduled to rally Republican members at the House of Representatives this afternoon before the highly anticipated vote on his tax reform legislation takes place.
Various House GOP leaders have asserted that they’re confident they have the votes required to pass the bill, but markets are anxious nonetheless, especially following the sequence of events that caused the failed health-care reform earlier in the year.
It should be noted, however, that this will only mark the beginning of the next phase in achieving tax reform, as once the legislation is in the House, the differences between the two chambers will need to be reconciled before any plans can become law.
The vote is nonetheless critical to this end, with success liable to attract a number of oversea businesses back to operating in the United States on the basis of a more internationally competitive 20% (down from 35%) corporate tax rate.
Because of this, a successful vote will likely send the US Dollar soaring and further cement its lead over the Pound.
GBP Outlook Hindered by Diminishing Prospect of BoE Rate Hike
Across the pond, things aren’t looking as good for the Pound, with the recent inflation figures printing below forecast at 3.0% instead of rising to 3.1%, prompting many investors to question the decision of the bank to raise interest rates in November.
Beyond this, the quicker-than-expected drop in inflation further diminishes the chances of a rate hike from the BoE in the first half of 2018, especially with inflation forecast to continue falling in the months ahead.
This understanding continues to limit the outlook for the Pound, and combined with the UK’s current political instability, the forecast for GBP USD remains firmly in the US Dollar’s favour.
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