Brexit Speculation and Fed Rate Hike Expectations Weigh on GBP USD Exchange Rate

December 20, 2016 - Written by Minesh Chaudhari

STORY LINK Brexit Speculation and Fed Rate Hike Expectations Weigh on GBP USD Exchange Rate

Worries over the government’s approach to Brexit have limited the appeal of the Pound (GBP) once again, with investors concerned by Prime Minister Theresa May’s continued reticence over revealing more of her strategy to Parliament.

GBP Exchange Rates Trended Lower Despite Bullish Retail Sales Data

Although the CBI retail sales index for December bettered forecast, strengthening from 26 to 35 on the month, this was not enough to shore up Pound Sterling on Tuesday.

While the data pointed towards a continued high level of consumer demand in the run-up to Christmas there are concerns that this confidence is likely to die back in the New Year.

As James Knightley, senior economist at ING, noted:

‘Inflation expectations have jumped in response to warnings from industry groups and individual companies that the pound’s collapse means higher costs that will likely be passed onto consumers. This is going to squeeze household spending power and may be partly responsible for the recent run of strong spending – people bringing forward purchases to avoid higher prices.’

This prospect helped to limit the strength of the Pound US Dollar (GBP USD) exchange rate, despite more hawkish commentary from Bank of England (BoE) policymaker Ian McCafferty.

Hawkish Fed Outlook Continued to Support Strong US Dollar

Confidence in the ‘Greenback’ (USD) was generally buoyant, meanwhile, with markets pricing in higher odds of the Federal Reserve raising interest rates multiple times in the coming year.

Despite Monday’s weaker-than-expected Services and Composite PMIs the US Dollar has remained on a stronger footing against its rivals, given the already hawkish tone of policymakers.

Even though expectations are not high for the week’s US data this is unlikely to have a particularly major impact on the GBP USD exchange rate, with the Fed primarily focused on wage and employment data at this juncture.

Thursday’s durable goods orders figure could nevertheless dent the US Dollar in the short term, as forecasts point towards a sharp contraction of -4.5% on the month in November.

Rising UK Government Debt Forecast to Weigh on GBP USD Exchange Rate

Demand for the Pound could weaken further on Wednesday in response to November’s UK public sector net borrowing figure, which is predicted to show a marked uptick in new government debt.

Expectations are for a headline figure of 11.6 billion, a substantial increase on October’s result and a rise that would not encourage confidence in Sterling.

As the UK’s wide trade deficit is a greater vulnerability in the wake of the Brexit vote any rise in government debt is likely to weigh heavily on the GBP USD exchange rate, particularly if the signs continue to point towards a harder exit from the EU.
If hopes of a softer form of Brexit are raised once again, however, the Pound could recover some support before the end of the week, though it is unlikely to hold onto any gains for long thanks to the more volatile state of markets at present.

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TAGS: Dollar Pound Forecasts Pound Sterling Forecasts