- Pound US Dollar Long-Term Forecast – Pair could continue hitting fresh three-decade lows
- GBP/USD Holds Above 1.30 on Wednesday – Sterling makes limited rally after decent stats
- Forecast: UK Retail Sales and Fed Minutes Lead Short-Term Movement – Jackson Hole speech ahead
- Forecast: Will Fed Hike Rates in 2016? – And what does 2016 dovishness mean for 2017?
Markets Double Down Focus on Fed Meeting for Pound US Dollar Forecast
The Pound to US Dollar exchange rate surged higher on Thursday thanks to a surprisingly optimistic UK retail sales report. The print revealed that sales had soared in July despite the Brexit vote, thanks to hot weather and tourism.
Meanwhile, the US Dollar plunged lower after Wednesday’s Federal Open Market Committee (FOMC) minutes revealed that Fed policymakers were split on whether or not to hike US interest rates in July.
The uncertainty in officials despite previous hawkishness caused hopes of a 50 basis point increase to fall even further, with most investors now believing in either a 25 basis point increase or no increase at all.
As the US Dollar’s correlation to Fed rate hike bets increases, it is likely that global markets are eagerly anticipating next Friday’s Federal Reserve symposium at Jackson Hole.
This meeting will be the first in a while where Fed Chairwoman Janet Yellen is expected to make a speech. The tone she takes in regards to monetary policy and the potential future of US interest rate hikes could set the US Dollar’s movement for quite some time, and thus will be highly influential for both short to mid-term GBP/USD forecasts.
(Previously updated 15:30 BST 17/08/2016)
The last couple of weeks have seen the US Dollar (USD) fluctuate with more frequency, meaning Fed rate hike bets are becoming increasingly important for long-term Pound US Dollar exchange rate forecasts.
GBP/USD surged on Tuesday night, approaching early-August levels after hitting a new three-decade-low of 1.2869 on Monday. The pair gained over a cent in value and hit a new weekly high of 1.3064. As of Wednesday afternoon the Pound US Dollar exchange rate was holding its ground above the key 1.30 level.
Wednesday’s UK data was unable to cause a significant shift in the movement of the GBP/USD exchange rate, but the US Dollar may influence movement later in the American session after the release of July’s FOMC meeting minutes. Failing that, Thursday’s UK retail sales report for July will be one to watch.
(Published 13:16 BST 17/08/2016)
Pound (GBP) Takes Advantage of US Dollar (USD) Selloff
The Pound was offered its first recovery opportunity in over a week on Tuesday, thanks to the UK’s latest Consumer Price Index (CPI) report coming in higher-than-expected.
UK inflation was expected to remain at 0.5% year-on-year, but instead improved to 0.6%. Better yet – the Office for National Statistics (ONS) stated that this figure does not seem to have been affected by the Brexit vote.
This decent data sparked markets to buy Sterling, and the buy-up continued as investors bought the currency from its cheapest levels.
The trend was extended against the US Dollar, as the US inflation results came in surprisingly low. This caused Fed rate hike bets to fall even further and the US Dollar plummeted.
Sterling capitalised on this, and was able to hold its ground thanks to a decent July jobless claims report published on Wednesday.
However, the US Dollar began to recover as investors returned to the currency in response to hawkish Fed official comments as they awaited the latest FOMC minutes report.
Pound (GBP) Forecast: What Inflation Trends are Likely to Emerge?
Tuesday’s UK inflation report confirmed one thing: that analysts who didn’t expect immediate post-Referendum trends to emerge were right.
With July’s CPI seemingly not affected by the Brexit vote, what does this mean going forward? Will there be an affect at all?
One released report that we can see had been affected directly by the Brexit vote was Tuesday’s Producer Price Index (PPI) report. Unrelated to CPI, this figure instead details the figures that goods producers have paid.
PPI increased to a whopping 4.3% in July’s year-on-year report, a sharp increase from the previous figure of -0.5% and far higher than the expected result of 2.0%. This figure was influenced by the low value of the Pound, making the costs of imports much higher for producers.
This increase in producer prices has the potential to transfer over to consumer prices in the coming months if producers begin to need bigger returns for their higher production prices.
It is because of this that many analysts are expecting UK inflation to spike to between 2.0% and 3.0% by mid-2017.
While 2.0% is the Bank of England’s (BoE) inflation target, this sharp uptick would cause issues alongside the bank’s low interest rate, and potentially cause UK real wages to fall as consumer prices rise – making things more difficult for the average citizen.
US Dollar (USD) Forecast: Is There Still Hope for a 2016 Fed Rate Hike?
At the beginning of 2016, the Federal Reserve outlined its intention to gradually raise US interest rates by 100 basis points throughout the year following its December rate hike (the first since the financial crisis).
This meant that markets were preparing for around four interest rate hikes in 2016. While this outline was later reduced to 50 basis points (around two rate hikes), thus far there have been zero.
The US rate hike plans have been regularly obstructed by global risks like the Brexit vote and China’s slowing economic growth, frustrating investors. Even after the Brexit vote appeared to have no real effect on the US economy, other US stats have disappointed causing perceived rate hike chances to dip further.
Among the current downside risks facing the US economy is the uncertainty around the US Presidential election, due to some of the controversial economic policies of potential candidates.
As the US Presidential election itself is in November, this is causing markets to severely doubt the likelihood of a September or November Fed rate hike. This leaves December as the only potential rate hike month among most analysts.
Analysts believe that US data will need to improve in the coming months, and that the new US President will need to maintain economic security in order for the Fed to raise rates this year.
By December, US markets may feel more confident that global downside risks are largely in the past. This means that 2017 has the potential to be that hawkish year that investors expected 2016 would be.
Pound US Dollar (GBP USD) Long-Term Forecast: Exchange Rate Risks on the Downside
The Pound is likely to continue dropping against the US Dollar even further in the mid to long term, especially if the US economy begins to sturdy itself once again by the end of 2016.
UK inflation increasing out of control could cause the country some more tangible economic struggles next year. This, coupled with the high chance of further Bank of England (BoE) economic stimulus, means the Pound is likely to see continued pressure with limited recovery opportunities.
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