Pound Dollar Exchange Rate Slumps as Strong US Retail Data Boosts Fed Hike Odds

Modified: Tuesday, 15 November 2016 17:05 BST - Written by Toni Johnson

STORY LINK Pound Dollar Exchange Rate Slumps as Strong US Retail Data Boosts Fed Hike Odds

Solid US Retail Figures Boosted US Dollar and Odds of December Fed Hike

Sentiment towards the US Dollar (USD) remained mixed on Tuesday, with investors struggling to maintain the steam of the earlier rally of Trump-based optimism.

Even so, the ‘Greenback’ was offered a fresh rallying point on the back of October advance retail sales data, which bettered forecast to clock in at 0.8% rather than 0.5%.

This showed that consumer confidence had remained robust in the run-up to the presidential election, a strong showing that also boosted the odds of the Federal Reserve opting to raise interest rates imminently.

Pound Sterling Trended Lower on Weaker-than-Forecast UK Inflation

On the other hand, the Pound (GBP) came under renewed pressure after a report circulated that the government still does not have a plan for Brexit negotiations.

Naturally this reignited worries over the outlook of the UK economy, particularly as Bank of England (BoE) Governor Mark Carney reiterated his intention to leave his role in June 2019.

Contrary to expectations, October’s UK Consumer Price Index did not edge higher, instead dipping from 1.0% to 0.9% on the year.

While this eased concerns over the negative impact of the falling Pound, albeit only temporarily due to the sharp jump in producer prices, markets were disappointed that this is likely to result in interest rates remaining low for longer.

US Dollar Forecast to Weaken as Confidence in Trump Fiscal Pledges Diminishes

Confidence in the ‘Greenback’ may moderate further over coming days, given that investors continue to lack a solid indication of what a Trump presidency will look like.

As Piotr Matys, EM FX Strategist at Rabobank, noted:

‘The positive influence of the fiscal impulse on the US economy could be offset by possible trade barriers that could lead to a full scale trade wars in the worst case scenario. This could still prove an obstacle for the Fed to switch to a faster hiking gear. Essentially, the markets seem to have fairly high expectations regarding Trump’s ability to deliver on his fiscal pledges. Financing all those ambitious fiscal projects suddenly became more expensive as yields have increased sharply across the board.’

However, as long as markets continue to price in high odds of a Fed interest rate hike before the end of the year the GBP/USD exchange rate is likely to struggle to gain any particular traction.

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TAGS: Pound Dollar Forecasts