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Will the US Dollar (USD) Rally Against Pound Sterling (GBP) Falter?

January 27, 2016 - Written by John Cameron

Sterling to US Dollar (GBP/USD) Exchange Rate has Slumped from Near-Term High of 1.5900

The US Federal Reserve raised its benchmark interest rate for the first time in almost a decade during the middle part of last month and the intervening period has seen the GBP USD exchange rate slump from a near-term high of close to the 1.5900 threshold during the middle part of last year as investors moved to factor-in the increasing chance of Fed policy tightening.

The relative improvement for the Buck accelerated following the North American central bank’s announcement that it would indeed be increasing its headline cost of borrowing.

The attendant fall in the value of the Greenback sent the GBP USD exchange rate down to 1.4091 on 21st January; this represented the lowest trading rate for Cable since the first half of 2009.

However, the six days which have followed have seen the Pound stage a concerted comeback against the Dollar, with the pair oscillating either side of the 1.4350 level over the past 24hrs. GDP printing as expected helped soften investor fears, even though the data showed how reliant on services the UK economy is, with the construction and manufacturing sectors experiencing a decline. Even better-than-expected consumer confidence hasn't done much to strengthen Sterling.

Speculation of Federal Reerve Rate Hike Delays is Weighing on US Dollar Demand

This bounce has been driven by a slight weakening of the Dollar and futures markets suggest that this has, in turn, been driven by a downgrading of US interest rate expectations. At the time that the Fed opted to begin a fresh policy tightening cycle in mid-December, futures markets were suggesting that the next Fed rate hike was likely to come as soon as March 2016.

However, those same futures markets now put the chance of a March rate hike in the US at only 30.1%, with the probability that American rates will still be at their current level of 0.50% come November standing at over 40%.

This shift in Fed interest rate forecasts from market participants is expected to hold back the Buck in the short to medium term; many analysts now bet that with low global oil prices suppressing inflation, the GBP USD exchange rate may climb back above the 1.5000 level sooner rather than later.

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TAGS: American Dollar Forecasts Pound Dollar Forecasts Pound Sterling Forecasts

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