GBP to USD Exchange Rate Recovers as Federal Reserve Rate Hike Bets Remain Weak

July 24, 2017 - Written by John Cameron

STORY LINK GBP to USD Exchange Rate Recovers as Federal Reserve Rate Hike Bets Remain Weak

Despite poor UK ecostats last week, the British Pound to US Dollar exchange rate began to recover on Monday. This was largely due to ‘Greenback’ weakness, as investors increasingly doubt the Federal Reserve will hike US interest rates a third time before the end of 2017.

Last week saw GBP/USD briefly hit a 2017 high of 1.3119 before dropping towards the end of the week. US Dollar weakness has left the GBP/USD exchange rate above the key level of 1.30 once again on Monday.

GBP Firms as Investors Anticipate UK Growth News

Sterling tumbled from multi-month-highs against the US Dollar last week, as poor UK ecostats and Brexit concerns left the British currency with broad weakness.

Pound investors are hoping that this week’s UK growth projections could give markets an opportunity to buy the currency up from its cheapest levels. This would extend its current recovery against the US Dollar.

For now though, the Pound’s gains are limited by various downside risks. Last week’s underwhelming UK inflation, retail sales and public sector borrowing results all indicated Britain’s economy could be in for a slowdown towards the end of the year.

This dampened speculation that the Bank of England (BoE) could tighten monetary policy any time soon and has been reflected by a fresh growth forecast cut from the International Monetary Fund (IMF).

Mihir Kapadia, CEO of Sun Global Investments believes that the IMF forecast reflects the recent uncertainty of Brexit negotiations and how this could affect the economy;

’With the IMF’s growth forecast for the UK cut from 2% to 1.7% for the year, this means there is again a focus on the debate about the effect of Brexit on the country’s business. While the IMF’s downgrade has been based on ‘tepid performance’, the ultimate impact of Brexit continues to remain unclear. The key factor which threatens to derail the economy and significantly reduce market confidence is the potential for either the Brexit talks collapsing or reaching stalemate.

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At the moment, there appears to be negligible progress on the talks and the IMF certainly would have factored the risk of talks stalling in reducing their economic growth forecast.’

USD Weak as Fed Rate Hike Bets Remain Low

Last week’s US inflation data fell short of expectations, increasing concerns that inflation would not remain high enough to support a third 2017 Federal Reserve interest rate hike.

A third 2017 rate hike from the Fed, seen as a shoo-in just a few months ago, is now looking less and less likely to markets. Bets that the Fed will leave rates frozen until 2018 are currently over 50%.

On top of this, political jitters are keeping pressure on the US Dollar. Over the last week, the US Republican Party’s attempts to pass a new healthcare bill hit considerable obstacles, making analysts question the future of the bill.

As a result, investors are also becoming less confident that US President Donald Trump’s proposed tax reform and infrastructure plans will see smooth passage through Congress either. This has weighed on the US economic outlook.

GBP/USD Forecast: Federal Reserve Meets This Week

The week ahead could end with the Pound to US Dollar exchange rate seeing another week of losses, or nearing 2017 highs once again.

Key events throughout the week have the potential to make the US Dollar more appealing again – or even less appealing.

On Wednesday, the Federal Reserve will hold its July monetary policy decision. The Fed is expected to leave policy frozen and investors will be focused on any potential change of tone from the bank’s statements.

If the bank hints that it still intends to hike rates a third time before the end of the year despite the slip in inflation, the US Dollar will surge and GBP/USD will fall further from its recent highs.

However, if the Fed indicates the next rate hike plan could be delayed into 2018, GBP/USD is likely to advance.

The US Dollar could also be influenced by any US political developments.

The biggest news this week for Pound traders, on the other hand, will be Britain’s Q2 Gross Domestic Product (GDP) growth projections, which will come in on Wednesday.

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TAGS: Pound Dollar Forecasts