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GBP to USD Exchange Rate Recovers from Lows as UK Employment Stats Beat Expectations

July 12, 2017 - Written by Minesh Chaudhari

Dovish comments from Bank of England (BoE) officials this week have left the British Pound to US Dollar exchange rate weaker, though the pair was able to recover from its lows on Wednesday due to decent UK employment stats and a weaker US Dollar.

Due to weakness in both currencies, GBP/USD has seen volatility this week. The pair started the week at the level of 1.2888. After falling to a July low of 1.2814 on Wednesday morning, the pair recovered to above 1.2850.

GBP Boosted by Decent Employment Data

After briefly dipping to lows against the US Dollar on Wednesday morning, Sterling recovered slightly as investors reacted to May’s UK labour market report.

Most notable was the news that wage growth excluding bonuses improved from 1.8% to 2%, rather than to the forecast 1.9%.

While this still confirmed that real wage growth was falling as the difference between inflation and wage growth deepened, it was still slightly better than investors had expected. This supported the Pound.

Sterling was supported further by May’s unemployment rate, which unexpectedly improved from 4.6% to 4.5%. June also saw less new jobless claims made than expected.

However, while Sterling recovered a bit from its lows, analysts gave pretty gloomy forecasts about Britain’s economic outlook following the report. Professor Costas Milas from Liverpool University’s Management School stated;

‘The Bank of England historical database, which reports unemployment rate data since 1856 is telling us that the unemployment rate has been below 4.5% 43%(!!!) of the times.

Since 1856, real average wage growth has been 1.54% and during this period, it has been negative only 22% of the times.
So in a historical context, we are currently doing very poorly in terms of real wage growth and reasonably (but not exceptionally) well in terms of the unemployment rate!’

The Pound’s recovery was limited as investor speculation that the Bank of England (BoE) could tighten monetary policy in the near future has largely disappeared.

Recent poor ecostats indicate that Britain’s economy will slow in the second half of 2017, which means cautious BoE policymakers like Governor Mark Carney and chief economist Andy Haldane may be unlikely to support any withdrawal of the bank’s quantitative easing (QE) scheme.

USD Strength Limited Ahead of Testimony from Fed’s Yellen

The US Dollar has been unable to capitalise on Pound weakness this week amid mixed market expectations for the Federal Reserve outlook.

On Tuesday, Fed official Lael Brainard took a mixed tone, stating that the Fed would likely begin to run off its balance sheet stimulus measures ‘soon’, but that the bank may not do much more in terms of US interest rate hikes.

While investors still expect another interest rate hike from the Fed in the mid-term, markets are highly uncertain about when exactly this, or the balance sheet run-off, will happen. Bets of a December rate hike are currently close to 50%.

The uncertainty in the Fed outlook, as well as concerns that US inflation could weaken, have weighed on the US Dollar this week.

However, the US Dollar steadied on Wednesday as investors awaited a US Congress testimony from Federal Reserve Chairwoman Janet Yellen.

GBP/USD Forecast: Yellen Speech in Focus

This week’s influential UK news and ecostats have largely come and gone, meaning the Pound is unlikely to see many big movements until next week’s UK inflation report is published.

As a result, the US Dollar’s strength is likely to drive GBP/USD movement for the rest of the week. Investors will be particularly focused on Federal Reserve Chairwoman Janet Yellen’s testimony to US Congress, which will take place over Wednesday and Thursday.

Markets are highly hoping that Yellen could offer more forward guidance on how soon the Fed could hike US interest rates again, or when the Fed will be rolling back its balance sheet.

If Yellen is more cautious than investors expect and indicates that the Fed may not take action for the rest of the year, the US Dollar will plummet and GBP/USD will advance.

The US Dollar will also be impacted by Friday’s US inflation stats from June. If US inflation slows further than expected, the ‘Greenback’ will weaken on concerns that the Fed may need to delay its monetary policy plans.
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