High BoE Inflation Expectations Weighed on Pound US Dollar Exchange Rate
There was little surprise that the Bank of England (BoE) opted to leave interest rates unchanged at its final policy meeting of 2016, although this nevertheless saw the Pound (GBP) trending lower across the board. Investors were discouraged by the tone of the accompanying minutes, which saw an unexpected lowering of the BoE’s inflation forecasts. This was seen to reduce the odds of policymakers raising interest rates in the near future, prompting investors to sell out of Sterling on Thursday.
Although the Pound US Dollar (GBP USD) exchange rate fell to a three-week low of 1.23 in response to this dovish signal, however, the pairing was able to recover some ground ahead of the weekend. Demand for the ‘Greenback’ (USD) weakened as a result of a mixed November Consumer Price Index report, with inflation excluding food and energy prices failing to rise in line with market expectations. This reduced the appeal of the US Dollar, even though this data is unlikely to deter the Federal Reserve from a more hawkish outlook on monetary policy in 2017.
GBP USD Exchange Rate Forecast: Higher UK Public Sector Borrowing Expected to Dent Pound
While market volumes are likely to be reduced in the final fortnight of the year there will nevertheless be fresh potential for GBP USD exchange rate volatility. Expectations are not high for November’s public sector net borrowing figure, which forecasts suggest could widen from -4.3 billion to -10.9 billion on the month. An increase in government borrowing would not bode overly well for the outlook of the UK economy, given its already wide deficit and consequent vulnerability to the weakness of the Pound.
The ongoing air of political uncertainty within the US could put some renewed downside pressure on the ‘Greenback’, with investors likely to be discouraged by any fresh developments regarding president elect Donald Trump. While November’s durable goods orders data is expected to point towards a sharp contraction in consumer demand this may not be enough to undermine the strong fundamental support of the US Dollar.
However, as Lee Hardman, currency analyst at MUFG, noted:
‘We expect recent trends to continue in the near-term although acknowledge that cable is coming under building pressure to succumb to broad-based US Dollar strength which could drag it back towards the 1.2000-level. One supportive factor in cable’s favour is that it is already extremely undervalued which could be helping to dampen further downside potential.’
Current Interbank Exchange Rates
At the time of writing, the Pound US Dollar (GBP USD) exchange rate was trending narrowly around 1.24, while the US Dollar Pound (USD GBP) pairing was on an uptrend at 0.80.
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