The Pound has performed decently against the US Dollar thus far this week. However, this is largely because US Dollar investors already consider a March Federal Reserve interest rate hike to be a foregone conclusion.
Due to a recent stream of solid US ecostats and hawkish comments from Federal Reserve officials, analysts and investors now believe a US interest rate hike will be confirmed at the conclusion of this week’s Fed meeting.
The assumed rate hike will be announced on Wednesday evening. As a March rate hike has already been priced into USD trade in recent weeks, it now faces key psychological resistance and has been unable to extend its gains this week.
USD investors are now looking ahead instead, anticipating when the next 2017 Fed rate hike could be. The Federal Reserve indicated in its December 2016 meeting that there could be two or three US interest rate hikes in 2017.
If the first is indeed confirmed this week there may be one, two or even more rate hikes between May and December depending on the ongoing performance of the US economy.
While there is no Fed meeting in April, investors will be keeping a close eye on key US ecostats like consumer confidence, financial sector growth, inflation and Non-Farm Payrolls as they bet on how soon the next hike may be.
If data continues beating expectations in the coming months, GBP USD is likely to fall as investors continue piling into the US Dollar on Fed rate hike bets. According to the CME futures tool, over 50% of bets believe another rate hike could take place in June.
However, other uncertainties also factor into the long-term Pound to US Dollar exchange rate, such as the actions of US President Donald Trump and his ‘Trumponomics’.
If Trump announces key fiscal policy overhauls that impress investors, the US Dollar could surge. On the other hand, some have speculated that Trump wishes to devalue the US Dollar.
If the Trump administration does indeed intend to influence USD lower, GBP USD could rise. Trump has already indicated on numerous occasions that he can move the markets simply by tweeting.
Over in the UK, investors remain concerned about Britain’s growth prospects due to slowing UK wage growth and rising inflation.
However, if the Bank of England (BoE) takes a more hawkish tone than expected this week (as some analysts speculate it may) the Pound could shoot up amid hopes of tighter monetary policy in the near future.
As it stands, the Pound to US Dollar exchange rate is likely to see minimal short-term influence from a Fed rate hike this week. However, it opens the door for investors to look ahead which could lead to months of lower GBP USD interest rates if US data continues impressing.
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