Pound to Dollar Exchange Rate Trends Narrowly After Dovish Fed Commentary

October 24, 2016 - Written by John Cameron

STORY LINK Pound to Dollar Exchange Rate Trends Narrowly After Dovish Fed Commentary

Mixed CBI Surveys Failed to Offer Pound Sterling Exchange Rate Direction

At the start of the week Pound Sterling (GBP) held in a narrow range against the US Dollar (USD) despite persistent market worries over Brexit and the government’s hard line on the matter.

With Prime Minister Theresa May signalling that the devolved nations will not receive greater powers and that Brexit will be a single deal for the UK as a whole, the prospect of further political turmoil remains.

The CBI survey for October failed to offer the Pound particular support, with a better-than-expected pick up in business optimism contrasted by a material decline in industrial orders.

This suggested that the domestic economy remained under pressure in October, giving investors fresh cause for worry ahead of the third quarter UK GDP report.

US Dollar Softened After Fed Policymaker Suggests Interest Rates will Remain Low for Longer

Confidence in the US Dollar was also somewhat muted as market risk appetite generally strengthened, with the safe-haven currency trending lower against many of its rivals as the appeal of higher-yielding assets improved.

Investors were a little wary ahead of the latest commentary from members of the Federal Open Market Committee (FOMC), with markets still assessing the odds of the Fed raising interest rates before the end of the year.

With a high likelihood of a December rate hike already priced into the ‘Greenback’ it remains on a less bullish trend, particularly after St Louis Fed President James Bullard reiterated the belief that interest rates will remain low for the foreseeable future.

Weaker UK GDP Forecast to Weigh on GBP/USD Exchange Rate

The Pound US Dollar (GBP/USD) exchange rate is expected to remain on a weaker footing over the coming days, barring any particularly negative US data.

Hopes are not high for Thursday’s UK GDP report, with economic momentum expected to have weakened markedly in the wake of the Brexit vote.

As Lee Hardman, Currency Analyst at MUFG, notes:

‘The Pound is likely to be far more sensitive to a downside surprise which would reinforce negative sentiment towards the Pound. The BoE’s staff recently upgraded their forecast for GDP growth in Q3 to 0.2%. A similar reading or weaker could reheighten recession concerns and reinforce expectations that the BoE will deliver another rate cut by year end weighing more heavily on the Pound.’

Should growth be found to have bettered expectations, however, the GBP/USD exchange rate could rally and regain some of its lost ground.

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