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GBP to USD Exchange Rate Investors Await US Inflation Results

August 11, 2017 - Written by Tim Boyer

Despite strong demand for ‘safe haven’ currencies this week, the British Pound to US Dollar exchange rate has only seen modest losses. The pair could see a stronger shift in movement when US inflation results are published.

After opening this week at the level of 1.3037, GBP/USD slipped slightly and has trended near a three-week-low of 1.2957 for most of the week.

GBP Limp as UK Data Fails to Impress

Investors have had no real reason to buy the Pound since the Bank of England (BoE) took a dovish stance in its August monetary policy decision.

The bank cut its UK growth and wage growth forecasts and issued fresh warnings on the potential effects of the Brexit process on Britain’s economy.

This worsened concerns about Britain’s long-term economic outlook and speculation that the BoE could take a more hawkish stance on monetary policy in the foreseeable future faded.

The past week’s UK data has failed to offer the Pound any fresh support either, as it ultimately disappointed.

While June’s industrial production report beat expectations and manufacturing production met them, both construction output and Britain’s June trade balance results fell short.

Construction was forecast to improve to 1.9%, but only reached 0.9%.

Meanwhile, the trade deficit deepened from £-2.52b to £-4.56b rather than coming in at around the forecast £-2.5b. This was the worst trade print in nine months and was largely due to Britain’s worst month for exports since June 2016.

This worsened market concerns that the low value of the Pound was not making British exports more appealing, and Britain’s economic outlook remains full of uncertainties.

According to Viraj Patel from ING;

‘The July bounce in Sterling was on some expectations that the Bank of England will increase interest rates at its latest policy meeting, but with fundamentals looking increasingly downbeat for the economy, it seems to to be a path of gradual weakness for Sterling.

USD Sturdier on ‘Safe Haven’ Demand but Data Disappoints

The US Dollar has been unable to capitalise on Pound weakness over the last week despite a surge in demand for traditional ‘safe haven’ currencies.

Geopolitical tensions between the US and North Korea have been ramping up all week, with US President Donald Trump making fresh threats on Thursday evening.

As markets become jittery at the possibility of military action from either nation, traders became risk-averse and bought into ‘safe haven’ investments like the US Dollar.

However, the past week’s US data has been mixed and Federal Reserve interest rate hike bets are low.

While Wednesday’s US wholesale inventories and nonfarm productivity reports beat expectations, yesterday’s US jobless claims data saw more new jobless claims made than expected.

Overall, the US economic outlook is uncertain and investors increasingly doubt the Fed will hike US interest rates again in 2017.

GBP/USD Forecast: US Inflation in Focus

The Pound to US Dollar exchange rate could still see a big shift in movement before markets close this week, depending on the results of the day’s US Consumer Price Index (CPI) report.

US inflation is forecast to have improved from 1.6% to 1.8% year-on-year in July, with the monthly rate forecast to rise from 0% to 0.2%.

New York Federal Reserve President William Dudley stated this week that he had confidence US inflation would rebound.

If US inflation beats expectations, Fed rate hike bets would surge and the US Dollar would see a notable increase in demand, pushing GBP/USD down further.

However, if US inflation fails to impress, investors will become even more concerned that the US economy will not be able to support a third 2017 interest rate hike and the US Dollar will weaken.

As for the Pound, it is unlikely to see a notable shift in direction until next week’s key UK data comes in.

Throughout next week, Britain’s July inflation and June wage growth results could impact Bank of England (BoE) speculation and the long-term Pound outlook.
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