GBP USD Exchange Rate Under Pressure Ahead of Second Quarter US GDP

July 28, 2017 - Written by David Woodsmith

STORY LINK GBP USD Exchange Rate Under Pressure Ahead of Second Quarter US GDP

Some of the air went out of the Pound US Dollar exchange rate’s sails in the wake of a disappointing UK GfK consumer confidence index, which edged deeper into negative territory.

Clocking in at -12 the survey returned to the lows seen in the immediate wake of the Brexit vote, with consumers showing increased concern over their finances and the domestic outlook.

With the government still showing a distinct lack of unity in its approach to Brexit the mood towards the Pound naturally soured on Friday morning, with this uncertainty set to weigh on the economy for some time to come.

Could US Dollar Strengthen Gains on Solid GDP Data?

Demand for the US Dollar picked up somewhat, meanwhile, as a result of better-than-expected US durable goods orders and advance goods trade balance figures.

As the world’s largest economy demonstrated fresh signs of strength investors were encouraged to pile back into the ‘Greenback’, with the odds of another 2017 interest rate hike from the Federal Reserve rising.

Even so, after the Fed took a more cautious view on inflation at its July policy meeting the likelihood of policymakers opting for more tightening before the end of the year still seems questionable.

However, as analysts at Scotiabank noted:

‘On inflation, there were remarks that overall inflation have declined and are running below 2.0%, but the committee still expects inflation to stabilise around the 2.0% objective in the medium term.’

Fresh volatility could be in store for the GBP USD exchange rate this afternoon, though, as markets await the latest US gross domestic product report.

Annualised growth in the second quarter is thought to have accelerated from 1.4% to 2.7%, a solid showing which would give the US Dollar further cause for confidence.

As analysts at Lloyds Bank commented:

‘That is well above most estimates of ‘trend’ economic growth and about double the lacklustre pace of Q1 growth. However, it is weaker growth than many were forecasting for Q2 just a few weeks ago. The rebound is likely to have been led by stronger consumer spending growth and a turnaround in inventories. In contrast, both business and housing investment growth is forecast to be slower than in the previous quarter, while net exports are also forecast to contribute less to growth.’

Despite the Fed’s worries over the inflationary outlook any signs of greater strength within the US economy are likely to boost bets that another interest rate hike could be on the horizon.

On the other hand, if the GDP data falls short of forecast this could offer the GBP USD exchange rate a strong rallying point ahead of the weekend.

As confidence in the Trump administration continues to wane, with the sense of political instability mounting due to the latest rifts within the White House, this could weigh heavily on the appeal of the ‘Greenback’.

Pound Volatility Forecast Ahead of BoE Decision

The Pound may struggle to gain any significant upside momentum ahead of next week’s Bank of England (BoE) policy meeting.

Despite the increased hawkishness of some policymakers the chances of an imminent interest rate hike remain distinctly limited, thanks to the relative softness of recent UK data.

Analysts at Danske Bank noted:

‘We do not expect a BoE rate hike before some time in 2019: GDP growth has slowed and has been weaker than the BoE anticipated, high inflation is temporary due to the weak GBP caused by Brexit, wage growth remains weak and does not indicate high underlying inflationary pressure and political uncertainty is high. We still view the core of the Monetary Policy Committee (including Governor Mark Carney) as being tilted to the dovish side.’

However, if the BoE adopts a more optimistic tone at Thursday’s meeting this could encourage the Pound to trend higher across the board.

The latest raft of UK PMIs will also be in focus in the coming days, with any signs of the economy losing further momentum likely to weigh heavily on the appeal of Sterling.

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TAGS: Pound Dollar Forecasts