Pound to US Dollar Exchange Rate Trends Lower Despite Steady UK GDP on Brexit Volatility

January 26, 2017 - Written by Ben Hughes

STORY LINK Pound to US Dollar Exchange Rate Trends Lower Despite Steady UK GDP on Brexit Volatility

The British Pound to US Dollar exchange rate plunged on Friday afternoon despite lower demand for the US Dollar, as UK markets took profit from the Pound’s weekly gains before the end of the week’s European session.

Investors were especially anxious about how the first diplomatic meeting between UK Prime Minister Theresa May and US President Donald Trump would go which is sure to affect GBP/USD movement when markets open next week.

[Previously updated 27/01/2017]

Despite the weaker expectations for the afternoon’s US data the Pound to US Dollar exchange rate extended its slump on Friday morning, dipping -0.40% on the day’s opening level.

Demand for the Pound weakened in the absence of fresh UK data, with the focus returning to Brexit and the speed at which the government hopes to push through its bill on Article 50.

[Previously updated 26/01/2017]

Although the fourth quarter UK GDP figures proved positive, this was not enough to shore up the Pound Sterling to US Dollar (GBP USD) exchange rate on Thursday.

Resilient UK GDP Failed to Boost Pound Sterling

Investors were initially encouraged to see that economic growth had remained steady at 0.6% on the quarter, with forecasts having pointed towards a slight loss of momentum at the end of the year.

However, the report indicated that the UK economy remains almost entirely dependent on the service sector, despite the drop in the Pound having been expected to offer support to the domestic manufacturing industry.

This reaffirmed the relative vulnerability of this economic growth, especially as consumer spending is likely to weaken as inflation rises further and pressures on wages increase.

Market jitters were also prompted by the publication of the government’s bill to trigger Article 50, with investors still nervous of the prospect of the harder line of political rhetoric and fraught nature of the upcoming negotiations.

US Dollar Benefits from Stronger Housing Market Data

Confidence in the US Dollar (USD) improved, meanwhile, in part thanks to a better-than-expected November house price index.

While political developments have continued to dominate the outlook of the ‘Greenback’, the modest uptick in house prices offered fresh cause for confidence in the health of the world’s largest economy.

With the odds still favouring another interest rate hike from the Federal Reserve in the near future, and investors hopeful that promised fiscal stimulus and tax cuts will be delivered, the underlying trend of the US Dollar has remained bullish.

This increased pressure on the GBP USD exchange rate, which continued to fall away from the multi-week high of 1.26 seen earlier on Thursday morning.

GBP USD Exchange Rate Forecast: Weaker US Personal Consumption Could Limit Fed Rate Hike Odds

Demand for the Pound is likely to remain limited ahead of the weekend, particularly with scrutiny of the government bill set to provoke fresh Brexit-based jitters.

The GBP USD exchange rate could find some support, however, with the fourth quarter US personal consumption expenditure figures expected to show weakness.

As this is the Federal Reserve’s preferred measure of inflation, any softening here would undermine the appeal of the US Dollar, limiting the odds of the Fed raising interest rates in the near future.

Political worries could also dampen the mood towards the ‘Greenback’, as Lee Hardman, currency analyst at MUFG, noted:

‘The recent shift in the market’s focus on to the more protectionist trade policies of President Trump and his comments signalling concern over the strength of the US dollar have clearly contributed towards its recent under-performance. Momentum remains in favour of further US dollar weakness in the near-term.’

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TAGS: Daily Currency Updates Dollar Pound Forecasts