Negative Forecast for Pound Sterling US Dollar Exchange Rate (GBP USD)

Modified: Sunday, 12 April 2015 23:59 BST - Written by John Cameron

STORY LINK Negative Forecast for Pound Sterling US Dollar Exchange Rate (GBP USD)

The Pound Sterling (currency:GBP) has slumped to its lowest level for close to five years against the US Dollar (currency:USD) during Friday afternoon’s session in the global currency markets. The GBP USD exchange rate dropped into the 1.4500s for the first time since June 2010 a short time ago as investors continued to support the Greenback following Wednesday’ Federal Reserve policy meeting minutes.

The memos of the March get-together showed that America’s rate-setters were divided on when the Fed should announce its first interest rate hike of a new policy tightening cycle. The minutes revealed that, ‘several participants judged that the economic data and outlook were likely to warrant beginning normalisation at the June meeting.’ This news came as a surprise to most commentators who had factored-in virtually no chance of a June rate increase following Fed Chair Janet Yellen’s comments in her post-decision press conference some three weeks ago.

At the other end of the scale, the minutes also showed that other policymakers, ‘anticipated that the effects of energy price declines and the Dollar's appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year, and a couple of participants suggested that the economic outlook likely would not call for lift-off until 2016.’

Judging by the price action for the Buck since Wednesday, market participants have moved to factor-in a higher likelihood that the Fed will be increasing rates sooner than was previously expected. The Dollar has recorded strong gains against both the Pound and the euro (currency:EUR) as a result.

Meanwhile, on the other side of the coin, Sterling has been held back on the day today thanks to a weaker than anticipated set of domestic industrial output figures, published this morning. The closely-monitored numbers revealed a month-on-month increase of only 0.1% between January and February when an increase of 0.3% was anticipated. Chris Williamson of Markit explained – ‘clearly this all bodes ill for economic growth in the opening quarter of the year. It's now looking like the economy slowed, and possibly quite markedly, compared to the 0.6% expansion seen in the closing quarter of 2014.’

Analysts now forecast that the Pound may underperform in the short-to-medium term.

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