Pound Sterling (GBP) to US Dollar (USD) Slumps as Fed Takes on Hawkish 2017 Outlook

December 15, 2016 - Written by Ben Hughes

STORY LINK Pound Sterling (GBP) to US Dollar (USD) Slumps as Fed Takes on Hawkish 2017 Outlook

The Pound to US Dollar exchange rate struggled to recover on Friday afternoon as American markets opened and the US Dollar increased in strength.

This was despite the day’s US ecostats coming in well below expectations. US housing start figures for November came in at -18.7% month-on-month while building permits came in at a low -4.7%.

[Previously Updated 1pm 16/12/2016]

Even with the Fed adopting a more hawkish view on monetary policy, forecasting three further interest rate hikes in 2017, the US Dollar has struggled to maintain its momentum ahead of the weekend.

Confidence in the Pound, meanwhile, has improved thanks to better-than-expected CBI industrial trends survey data.

[Previously updated 15/12/2016]

The Pound to US Dollar exchange rate plunged on Wednesday following the Federal Reserve’s widely anticipated December meeting. The Fed hiked rates by 25 basis points as expected but it was the Fed’s forecast for three 2017 hikes that left the US Dollar stronger.

GBP/USD had briefly hit a weekly high of over 1.27 on Wednesday evening before the meeting, but afterwards it plunged by almost two cents. By midday on Thursday, GBP/USD had fallen to 1.2484, its worst levels since late November.

Pound (GBP) Limp as Bank of England (BoE) Leaves Policy Unchanged

Sterling was pushed down easily by the US Dollar on Thursday as investors continued to express optimism in USD after the Fed’s hawkish tone during Wednesday’s policy decision.

The latest UK ecostats failed to lend the Pound any considerable support either. Thursday’s November retail sales results came in at 0.5% month-on-month, beating a projected stagnation at 0.0%. The yearly score also slowed less-than-expected, from 7.5% to 6.6% rather than to 6.0%.

Thursday also saw the Bank of England (BoE) hold its final policy decision of 2016.

The meeting saw no change to monetary policy as markets predicted, but Sterling was still weakened slightly as investors were disappointed that increases in inflation had not deterred the BoE from its easing bias.

US Dollar (USD) Demand Bolstered by Fed’s Hawkish 2017 Outlook

Demand for the US Dollar increased during Wednesday’s American session as the Federal Open Market Committee (FOMC) was more hawkish than expected in its outlook on 2017’s monetary policy outlook for the US.

The US Dollar’s advances were slightly limited as traders had already priced in the correctly predicted 25 basis point interest rate hike – from 0.50% to 0.75%.

However, Fed Chairwoman Janet Yellen also played up the performance of the US economy and hinted that the Fed would aim for three rate hikes in 2017 – more than analyst expectations of just two.

While Yellen expressed uncertainty about the incoming US fiscal policies (from the controversial Trump administration) the hawkish sentiment was overall enough to strengthen USD this week.

GBP/USD Forecast: Sterling could be Bought from Lows in Coming Weeks

The Pound to US Dollar exchange rate currently trends near its worst levels since November. While it’s far above October’s multi-decade-lows, it’s unlikely GBP/USD will fall far in the short term with Brexit hopes improving.

If new Brexit news or discussions continue to add to investor hopes of a smooth or transitional Brexit, or give analysts some idea of what the UK government’s plans will actually be, the underlying Pound outlook will improve again slightly.

However, unless investors decide to buy the Pound up from its cheapest levels on Friday, GBP/USD is well on track to end the week lower.

The data due for publication on Friday is unlikely to influence shifts in GBP/USD trade, as the UK will only see CBI trends figures while the US November housing starts and building permits results are not as influential as the US news from Wednesday and Thursday.

Overall, the current GBP/USD trend is downwards, but this could be interrupted if traders opt to take profit from the ‘Greenback’s highs or buy Sterling from its lows.

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