- US Dollar boosted by Fed hawkishness – Pound exchange rates unsettled despite positive July data
- Federal Reserve continues to shift investor opinion – Lack of clarity concerns economists
- Latest UK data causes scepticism among investors – Is post-Brexit economy really stable?
- US payrolls due before September Fed decision – UK August PMIs expected pre-BoE’s September rate call
US Dollar Pound exchange rates have been progressively improving since the EU Referendum vote, but more recently, losses have been seen in the pairing due to UK domestic data.
After falling to over 30-year lows the Pound was granted some respite against the US Dollar in mid-August, though just how stable recent gains are in the long-term remains to be seen.
US Dollar Pound Rate Rallies on Fed Remarks, GBP Unsettled after Borrowing Data
The US Dollar Pound exchange rate rose considerably on August 19th, thanks to remarks made by Fed official John Williams.
Though not voting on US interest rates this year, Williams is still an influential figure within the Fed. His latest commentary on a possible Fed rate hike in September was hawkish, with the central bank official stating;
‘It makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later. If we wait until we see the whites of inflation’s eyes, we don’t just risk having to slam on the monetary policy brakes, we risk having to throw the economy into reverse to undo the damage of overshooting the mark […] that creates its own risks of a hard landing or even a recession’.
This outlook sent US Dollar (USD) exchange rates soaring, though should no near-term rate hike take place, the US Dollar may end up devalued in the long-term by such sentiment.
For Pound exchange rates, Sterling was aided on August 18th by far better-than-expected retail sales results for July, which rose above forecasts on both the month and the year.
More recently, however, the public sector net borrowing figures for July have been given a mixed reception, a borrowing surplus recorded on the month being countered by the argument that this was due to many companies paying corporation tax during.
US Fed Comments Fail to Clarify Issue of Potential September Rate Hike
Sticking with the issue of a potential September interest rate hike, a string of recent hawkish comments from Fed officials have contrasted significantly with the minutes of the Fed’s July interest rate decision, which resulted in yet another rate freeze.
Inflation factored into the decision, at least among some members, with the minutes stating;
‘Members judged it appropriate to continue to leave their policy options open and maintain the flexibility to adjust the stance of policy based on incoming information. A couple of members preferred also to wait for more evidence that inflation would rise to 2% on a sustained basis’.
From August 15th to 19th, however, Fed officials have been turning bearish in their comments; Fed non-voting member Dennis Lockhart said that ‘I think at least one increase of the policy rate could be appropriate later this year’, while actual voting member James Bullard voiced his support for just one rate hike to tide over the economy for the ‘foreseeable future’.
Joining these voices in supporting a rate hike was fellow voting member William Dudley, though reserve voting member Robert Kaplan adopted a more neutral stance, saying;
‘There is room for the Fed to manoeuvre but not as much as people might think because the neutral rate of interest is somewhat lower than people think. It’s a challenging time’.
Questions Raised about How Post-Brexit UK is Faring Given Latest Data
For Pound Sterling (GBP) exchange rates, signs that the UK economy is weathering or even improving after the EU Referendum are crucial to restoring its value in the currency market, as was seen after the July retail sales results were announced.
While Sterling rallied in the wake of this news, the bigger picture may still prove an unpleasant one for investors to bear. So said Pantheon Macroeconomics Chief UK Economist Samuel Tombs, who stated that;
‘July’s retail sales figures show that consumers have been protected from the immediate fallout of the ‘Brexit’ vote, but with firms intending to stop hiring and inflation set to soar, the High Street is set for a tough year. The real test for consumer spending lies in 2017 when jobs cuts will kick in and inflation will erode spending power’.
Even the rising retail sales were deflated somewhat by the fact that as a summer month, July’s sales were expected to be high anyway due to summer spending from tourists and holidaymakers.
Regarding the initially well-received borrowing surplus in July, IHS Chief UK and European Economist Howard Archer pointed out that;
‘The public finances look poised to take a serious hit from probable significantly weakened economic activity after the ‘Brexit’ vote, taking a toll on tax receipts in particular. It also seems probable that unemployment will rise, while any slowdown in the housing market will hit Stamp Duty receipts’.
Long-Term USD GBP Forecast: US Fed Decision, UK PMIs and BoE Rate Activity Key
With the possibility of a Fed interest rate hike and Bank of England (BoE) interest rate cut taking place in September, it is worth taking a look at the scheduled events leading up to these decisions that may swing the outcomes.
For the US, the change in non-farm payrolls result on September 2nd will be crucial, as will the unemployment rate, both for August.
After the previous forecast-beating payrolls figure, a shift down is expected, from 255k to 200k. With unemployment, a damaging rise from 4.9% to 5% has been forecast.
As the US Presidential Election is taking place in November, a rate hike seems off the table for that month, therefore only two chances remain for the Fed in 2016 to hike the rate – September 20th and December 8th.
With the next BoE interest rate decision, the likelihood of a rate cut or rate hike is hazier when it comes to predicting. The big news before the September 15th meeting will be early September’s manufacturing, construction and services PMIs for August, which have been predicted to remain in the sub-50 contraction range.
Should other more positive announcements come out, however, it is distinctly possible that the BoE may even hike the UK interest rate, with a large number of positive economic movements potentially indicating that August’s historic rate cut was a hasty action.
Recent USD GBP Exchange Rates
At the time of writing, the US Dollar Pound (USD GBP) exchange rate was trending in the region of 0.7621 and the Pound US Dollar (GBP USD) exchange rate was trending in the region of 1.3121.
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