Despite Pledge to put City ?at Heart of Brexit Negotiations? Pound Dollar Exchange Rate Crashed

October 25, 2016 - Written by Ben Hughes

STORY LINK Despite Pledge to put City ?at Heart of Brexit Negotiations? Pound Dollar Exchange Rate Crashed

Pound Sterling Plunged Following Chancellor of the Exchequer Brexit Commentary

Comments from Chancellor of the Exchequer Philip Hammond failed to shore up the Pound (GBP) on Tuesday, despite him pledging to put the City at the heart of Brexit negotiations.

Some measure of this downside pressure likely stemmed from Hammond’s warning that EU members could be driven more by political than economic considerations with regards to the terms of Brexit, suggesting a harder Brexit could be likely.

Investors drove the Pound down further across the board over the course of the afternoon, with Sterling slumping sharply ahead of Bank of England (BoE) Governor Mark Carney’s testimony to the House of Lords Economic Committee.

Recent criticism of the BoE’s quantitative easing program has been seen to put more of a question mark over Carney’s continuation in the role once his initial term ends in 2018, with markets jittery over the prospect of the Governor’s departure.

Mixed Messages from Federal Reserve Limited US Dollar Gains

Confidence in the US Dollar (USD) had been boosted by commentary from Chicago Fed President Charles Evans, who indicated a belief that interest rates could be raised three times before the end of 2017.

However, comments from other members of the Federal Open Market Committee (FOMC) painted a more dovish picture, suggesting that the monetary tightening cycle is likely to remain more gradual in the long term.

Further downside pressure came from a disappointing October Consumer Confidence Index, which showed that sentiment had softened on the month from 103.5 to 98.6 as election jitters increased.

This suggests that the world’s largest economy is not in quite such a robust state as the Federal Reserve might wish, although this was not enough to prevent the Pound US Dollar (GBP/USD) exchange rate sliding further.

GBP/USD Exchange Rate Forecast: UK and US GDP Data in Focus

Some measure of support for the GBP/USD exchange rate could emerge on Wednesday, providing that the latest UK mortgage data points towards continued strength within the domestic housing market.

Worries over the upcoming third quarter UK GDP report, however, are expected to limit any Pound uptrend in the near term.

The appeal of the US Dollar could be boosted, meanwhile, if domestic wholesale inventories and Services PMI figures offer further evidence of economic strength.

Further pressure for the GBP/USD exchange rate is expected ahead of the weekend as markets adjust the pricing of an imminent Fed rate hike, with researchers at Rabobank noting:

‘The FOMC intends to squeeze in that hike before the end of the year if economic growth picks up, slack in the labour market diminishes, and inflation rises. Therefore, Friday’s release of Q3 GDP growth will be of particular interest to the FOMC. After three quarters of disappointing growth (with 1.4% in Q2), the Fed is anticipating a pickup in Q3.’

Should growth fail to live up to expectations then the GBP/USD exchange rate could rally markedly, although the outlook for the Pound remains bearish.

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