Pound Sterling to US Dollar Exchange Rate Forecast Lower, Sterling Advances Overall against Peers

March 16, 2016 - Written by John Cameron

STORY LINK Pound Sterling to US Dollar Exchange Rate Forecast Lower, Sterling Advances Overall against Peers

The Pound has shrugged off a pessimistic quarterly bulletin from the Bank of England (BoE) today, which repeated the concern that volatility will increase as the Referendum vote gets closer.

Noon today saw the Pound make major gains against its currency competitors, thanks to the Bank of England (BoE) not fueling rumours of an interest rate cut in its most recent minutes.

A substantive downgrade to Britain’s medium term growth forecast has hurt the Pound Sterling (currency : GBP) during this afternoon’s session. UK Chancellor of the Exchequer George Osborne informed parliament during his budget statement that the Office for Budget Responsibility (OBR) had downwardly revised its Gross Domestic Product growth forecast for this year to a relatively lowly 2.0% from an earlier 2.4%.

Office for Budget Responsibility Cuts UK Growth Forecast, Pound (GBP) Weakens

The OBR’s growth forecast for the UK PLC’s growth rate was also downgraded from 2.5% to 2.2% for next year and to 2.1% in the subsequent three years. Despite Chancellor Obsorne’s repeated assertion that he will balance his nation’s books by the year 2020, the markets chose to focus on the slashing of GDP forecast by the OBR and the Pound lost ground against the other sixteen most actively traded global currencies as a consequence. The Pound Sterling euro exchange rate slumped to as low as 1.2673 GBP-EUR as Osborne got to his feet, while the Pound-Australian Dollar exchange rate briefly traded into the 1.8800s as investors priced-in the reduction to expected British growth in coming years. Traders also remained somewhat unconvinced by the Chancellor's ability to eliminate the UK's deficit by the end of the current parliament, with some economists suggesting that the measures announced in the budget were not sufficient to achieve this goal.

FOMC Policy Statement Main Global Risk Event, Dollar (USD) Firm

The main risk event, on a global scale at least, is still to come. The US Federal Reserve makes its latest monetary policy announcement at 1800hrs UK time and Fed Chair Janet Yellen holds a press conference 30 minutes later. At the time of writing, futures markets are pricing in a 94.2% chance that the Fed will maintain its headline interest rate at its current level of 0.50%, with a minority chance that they will cut back to 0.25%.

However, the same futures markets suggest that there is a near 85% likelihood that the Fed will have increased its key interest rate by Christmas. This figure is almost certain to change based on tonight’s new information – if the probability of another rate hike in 2016 increases towards 100%, then analysts forecast that the Pound Sterling US Dollar exchange rate will settle back below the psychologically significant 1.4000 threshold GBP USD. Should the chances of further monetary tightening be seen to decrease in the near future, on the other hand, the US Dollar could weaken substantially against rivals.

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TAGS: Pound Dollar Forecasts