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USD GBP Exchange Rate Could Surge on Hawkish Fed Commentary

March 15, 2017 - Written by Ben Hughes

The US Dollar to British Pound exchange rate plunged on Thursday afternoon following the week’s Bank of England (BoE) policy decision.

While monetary policy was left frozen as expected, Kristin Forbes, a member of the Monetary Policy Committee (MPC), unexpectedly voted to hike UK interest rates back up to 0.5%. This bolstered bets that the BoE would tighten UK monetary policy in the foreseeable future.

[Previously updated 11:00 am]

Although there was some disappointment that the Federal Open Market Committee was not more hawkish in its outlook the US Dollar to Pound exchange rate soon returned to an uptrend.

With the Bank of England likely to maintain a neutral view on monetary policy today there has been little reason to favour the Pound, particularly as anxiety over Brexit remains a downside influence.

[Previously updated 15/03/2017]

With an imminent interest rate hike from the Federal Reserve already priced in the US Dollar to British Pound exchange rate remained on an uptrend throughout Wednesday’s European session.

USD Trended Lower in Anticipation of Fed Rate Hike

Even though February’s advance retail sales figure showed a slowdown on the month, dipping from 0.6% to 0.1%, this was not seen to have any detrimental impact on the likelihood of the Fed hiking rates tonight.

Indeed, the latest consumer price index report seemed to offer fresh encouragement to policymakers, given that inflation rose to its highest level since March 2012.

The bullishness of domestic inflation points towards the central bank adopting a more aggressive pace of monetary tightening over the coming months, in order to prevent the economy from overheating.

However, with markets taking a more cautious view in anticipation of the Fed rate decision the USD GBP exchange rate remained on a weaker footing for the time being.

Weaker Wage Growth Limited GBP Upside Momentum

While the Pound got off to a strong start during Wednesday’s European session, recovering from a fresh bout of Brexit-based anxiety, it struggled to hold onto all of its bullish momentum.

Demand for Sterling softened somewhat in response to disappointing UK wage figures, with growth in average weekly earnings having slowed from 2.6% to 2.2% at the beginning of the year.

This points towards consumers suffering a greater squeeze on their spending power, something which weighed heavily on sentiment given that much of the recent strength of the domestic economy has been driven by consumer demand.

But with unemployment falling to a multi-decade low of 4.7% the mood towards the Pound remained generally positive, shoring up GBP exchange rates.

USD GBP Exchange Rate Forecast: Hawkish Fed to Boost USD Demand

The aftermath of the Fed’s policy meeting is nevertheless likely to provoke renewed volatility for the ‘Greenback’, with investor focus turning to commentary from Chair Janet Yellen and the updated policymaker forecasts.
As researchers at Lloyds Bank noted:

‘The median of individual Fed members’ policy rate projections in the updated ‘dot plot’ is likely to reaffirm a total of three hikes this year, in line with our expectations, but there may be a greater skew towards four or more hikes than before.’

If the outlook appears to be more hawkish in nature this could see the USD GBP exchange rate rally sharply, encouraging greater confidence in the resilience of the US economy in spite of any domestic political worries.
However, the Pound could find fresh support if the Bank of England (BoE) expresses greater confidence at its own policy meeting.
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