Jitters Ahead of US Employment Figures Limit Pound US Dollar (GBP/USD) Exchange Rate Momentum
Ahead of the latest US non-farm payrolls data the Pound to US Dollar (GBP/USD) exchange rate was trending in a narrow range, lacking any particular momentum.
Confidence in the US Dollar (USD) picked back up in the wake of a stronger-than-forecast ADP employment change figure, which raises the odds of a bullish non-farm payrolls report.
While the two figures are not necessarily correlated this was still enough to boost USD exchange rates, encouraging bets that the US labour market continued to tighten at the end of 2017.
However, the GBP/USD exchange rate may return to an uptrend if the report fails to show any improvement in US wage growth.
As the Federal Reserve has expressed some disquiet over the continuing sluggishness of domestic wage growth a weaker showing here could see the odds of an imminent interest rate hike decline further.
On the other hand, if growth in average weekly earnings exceeds the forecast 2.5% on the year then sentiment towards the US Dollar is likely to turn bullish.
Mixed UK PMIs Offer Limited Support to GBP/USD Exchange Rate
The mixed nature of December’s raft of UK PMIs encouraged volatility for the GBP/USD exchange rate over the course of the week.
While investors were encouraged by the solid growth in the headline services PMI the underlying message of the data was less positive, suggesting that the UK economy will struggle to maintain its current momentum in 2018.
This bearish outlook leaves GBP exchange rates vulnerable to the downside, particularly given the level of uncertainty that still surrounds the matter of Brexit.
In the week ahead the Pound (GBP) could also come under pressure due to renewed political jitters, with anticipation for Theresa May’s cabinet reshuffle running high.
Unless the Prime Minister is seen to consolidate her power-base and strengthen her rather fragile position the GBP/USD exchange rate is likely to trend lower.
Higher US Inflation Forecast to Boost US Dollar (USD) Exchange Rates
Next Friday’s US consumer price index may weigh on the GBP/USD exchange rate, with the US Dollar likely to capitalise on any signs of rising inflation.
Although CPI is not the Fed’s preferred measure of inflationary pressure a stronger showing here could still boost demand for USD and give policymakers greater cause for confidence.
Even so, as Philip Marey, Senior US Strategist at Rabobank, noted:
‘All in all, the FOMC appears to be losing cohesion as the end of Chair Yellen’s term comes in sight. Conflicting views on inflation and the appropriate amount of rate hikes, as well as doubts about the current monetary policy framework, will be a challenge for Powell when he takes over after the January 30-31 meeting of the FOMC.’
A sense of uncertainty over the policy outlook is still likely to hamper US Dollar demand, regardless of the strength of domestic data in the near term.
Even so, the GBP/USD exchange rate may struggle to find much upside potential over the coming days if US data continues to better forecast.
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