Optimistic Fed Rate Forecast Encourages Pound US Dollar (GBP/USD) Exchange Rate Weakness
Renewed market speculation over the likely pace of Federal Reserve monetary tightening in 2018 left the Pound to US Dollar (GBP/USD) exchange rate on a weaker footing at the start of the week.
Even after the disappointing nature of December’s non-farm payrolls report the US Dollar (USD) began to recover ground, boosted by comments from Fed policymakers.
San Francisco Fed President John Williams struck a rather confident tone on monetary policy in his latest comments, noting that interest rates should be raised three times over the course of 2018.
This naturally encouraged investors to buy back into the US Dollar, even though the overall opinion of the Fed still looks to be mixed at best.
Given USD’s softer start to the year the GBP/USD exchange rate faces downside pressure in the near term, with markets moving to correct their valuation of the US Dollar.
Imminent UK Cabinet Reshuffle Weighs on Pound US Dollar Exchange Rate
On the other hand, the GBP/USD exchange rate trended lower as investors braced for news of Theresa May’s much-anticipated cabinet reshuffle.
While there is no expectation for major posts such as the Foreign Secretary or Chancellor of the Exchequer to change hands Sterling jitters picked up nevertheless.
Unless the Prime Minister is seen to bolster her position through the reshuffle the mood towards the Pound is unlikely to improve significantly in the short term.
Any major surprises could encourage greater GBP/USD exchange rate volatility, especially if investors see fresh reason to doubt the length of Theresa May’s tenure in Downing Street.
The disappointing nature of December’s Halifax house price index added to the pressure on the Pound (GBP), with signs pointing towards further slowing of the UK housing market.
US Political Risks Forecast to Limit USD Exchange Rate Upside
In the longer term, worries over the US economy and political climate could help to shore up the GBP/USD exchange rate.
Some degree of scepticism remains over the ultimate economic impact of the Trump administration’s tax reforms, which markets worry may hamper economic growth in the years ahead.
Unless there are greater signs of unified hawkishness within the Fed the upside potential of the US Dollar is likely to remain limited, with the course of 2018 monetary policy still looking less than clear.
Politics on the whole are set to remain a key risk for the USD outlook, meanwhile, as Viraj Patel, Research Analyst at ING, commented:
‘These political risks lie deeper than the noise around Michael Wolff’s ‘Fire and Fury’ book; a change in America’s status in the world political order may have long-run economic consequences for a country reliant on ‘the kindness of strangers’ to fund its twin current account and fiscal deficits. Such structural risks means that we remain wary over chasing fleeting $ upside.’
GBP/USD Exchange Rate Volatility Forecast on UK GDP Estimate
If the NIESR gross domestic product estimate for the fourth quarter of 2017 proves encouraging this could see the GBP/USD exchange rate rally.
Forecasts point towards growth holding steady at 0.5% on the last three months, continuing to shrug off much of the uncertainty that still surrounds the issue of Brexit.
Any softening of the GDP, however, could weigh heavily on the Pound, with the economy likely to struggle to gain any particular momentum in the coming months barring a significant breakthrough in Brexit talks.
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