GBP USD exchange rates are falling despite strong construction data as election jitters and US rate hike expectations undermine the Pound.
A -0.2% drop has taken the Pound Sterling US Dollar exchange rate down to 1.2855, but could GBP be facing more headwinds, even after the election is settled?
Will another US interest rate hike further support the USD to the detriment of Sterling?
The latest UK construction PMI has been unable to support the Pound, despite climbing to a 17-month high of 56 during May.
Markets are reluctant to believe the result on its own, given that Markit PMIs have recently been more upbeat about the economy than hard data later released by the Office for National Statistics.
Additionally, political fears are overshadowing domestic data releases, with the election now just six days away.
Meanwhile, the outlook on US monetary policy continues to strengthen following an upside surprise from the latest ISM manufacturing index and an above-forecast ADP employment change figure showing 73,000 more people were newly-employed than forecast at 253,000.
Today’s influential non-farm payrolls report would therefore have to show dire weakness in job creation for expectations of a Fed rate hike to weaken.
Expectations of monetary tightening during the June 14th FOMC meeting have therefore now leapt to 95.8%, but what are the odds that policymakers will opt for a third hike before the year-end?
Three hikes would actually be an undershoot of forecasts as far as the Federal Reserve is concerned, with the central bank having claimed after the December 2015 meeting that it would tighten policy four times this year.
Markets are still expecting a third hike, with Fed funds futures showing a 42.2% of another 0.25% increase in borrowing costs coming in December, while there is an 11.1% chance of costs having increased by 0.5% to 1.50%.
San Francisco Federal Reserve Bank President John Williams certainly believes rates should be hiked another two times over the remainder of 2017.
Speaking recently at a Bank of Korea forum in Seoul, Williams noted that a surprise boost to the economy from fiscal stimulus policies could even create the need for a fourth round of monetary tightening.
‘There is potential for upside occurrences in the economy,’ he said. ‘One big question mark is if there is big fiscal stimulus or other changes in the outlook that we see the economy is doing better than we thought.’
According to the Fed’s dot plot of monetary policy outlook, four officials believe that the target interest rate should be 1.625% by the end of the year, while one official is projecting rates at 2.125%.
Fed official Patrick Harker will be speaking later today, so there is a chance his comments will raise or lower the likelihood not only of a hike this month, but of another later in the year.
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