US markets breathed a sigh of relief during Wednesday’s American session, as the Federal Reserve bank indicated that there were still two more US interest rate hikes on the table for 2017.
Rising concerns about US economic activity after a disappointing Q1 faded when Fed Chairwoman Janet Yellen stated that the bank perceived this unexpected slowing as temporary.
As a result, Fed rate hike bets for June rose and the US Dollar outlook improved.
The Pound US Dollar outlook is a little higher on Thursday due to Britain’s better-than-expected trio of PMI stats this week, but if market hopes of a June rate hike from the Fed increase, GBP USD gains may be limited.
[Previously updated 16:37 BST 03/05/2017]
After attempting to recover earlier in the day, the Pound US Dollar exchange rate dropped again on Wednesday afternoon due to solid US data and increased Brexit concerns.
UK Prime Minister Theresa May accused certain EU politicians of attempting to influence the UK election on Wednesday and took an increasingly tough stance, reminding markets that her government would rather take no UK-EU deal than a bad one.
As US services PMIs from ISM and Markit both beat expectations according to Wednesday’s reports, the US Dollar strengthened in the afternoon.
However, with the May Federal Reserve meeting ahead the GBP USD outlook could still see a significant shift in direction before European markets open on Thursday morning.
[Published 11:04 BST 03/05/2017]
The Pound US Dollar exchange rate recovered slightly on Tuesday thanks to UK manufacturing data and could rise further if Britain’s services PMI also impresses. After a brief slip to 1.28 on Tuesday, the pair returned to trend in the region of 1.29.
However, the biggest potential shock to markets could come on Wednesday night during the Federal Reserve’s May policy decision.
The Federal Reserve has taken a cautiously optimistic tone towards US interest rate hikes this year and has hiked the rate twice since December 2016. The current rate is 0.75-1% after a hike in March.
However, consumer confidence and market confidence has slipped in the last month or so due to a bumpy start for US President Donald Trump.
Market confidence fell after Trump failed to push his healthcare reform plan through Congress successfully. Traders began to doubt that he would be able to successfully pass his tax and fiscal policy proposals, disappointing markets that had hoped Trump would offer a short-term boost to the US economy.
Slowing US economic growth in Q1 and slowing manufacturing activity (according to April PMIs) have also weighed on USD sentiment and Fed rate hike bets.
Bets of a May interest rate hike have been low for some time, but under 5% of betters currently believe the Fed will rate hikes this week.
Bets of a June interest rate have also been dropping. In late April, over 70% expected that the Fed would hike rates in June but now under 65% do.
Market expectations for rate hikes could even plummet this week depending on the tone the Federal Reserve takes in its policy decision.
If the Fed takes recent US data and political uncertainty and urges caution, Fed rate hike bets could plummet – which would have a strong downside effect on short to long-term US Dollar trade.
That would also lead to solid GBP USD gains this week and allow the Pound to capitalise on a weaker US Dollar if Britain’s April services PMI from Markit beats expectations.
Both Britain’s manufacturing and construction PMIs have beaten expectations in April, adding to hopes that the nation’s major services sector may also have beaten expectations.
However, it’s worth noting that while the Pound’s drop in value has made UK exports more competitive and improved the manufacturing sector, Sterling’s weakness is thought to have had the opposite effect on the services sector.
The services sector is heavily consumer-facing and Sterling’s weakness has caused consumer prices to rise. This as well as slowing wage growth has meant households have been reining in spending, denting the services sector.
GBP USD investors will spend most of Thursday reacting to the UK services and Federal Reserve news, but these reports could also have long-term implications for the pair.
If the Fed does indeed wind back on its 2017 interest rate hike outlook, the US Dollar’s strong streak seen earlier in the year could come to a definite stop. In this scenario, GBP USD would likely put in more considerable gains regardless of UK data.
At the time of writing this article, the Pound US Dollar exchange rate trended in the region of 1.29. The US Dollar to Pound exchange rate traded at around 0.77.
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