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Intraday Pound to Dollar Rate Price Patterns "Look Weak, Bearish Outside Range Session on 6-Hour Chart"

September 13, 2017 - Written by Toni Johnson

The British Pound to dollar exchange rate has "stumbled badly" after the latest UK wage growth figures missed forecasts.

GBP/USD fell to trend in the region of 1.3282, although the US Dollar has made gains more thanks to the weakness in the Pound than because of any intrinsic strength.

Scotiabank analysts note a bearish near-term outlook in a brief to clients on Wednesday:

"Sterling extended gains through to the low 1.33 area in early London dealing before stumbling badly and dipping to the mid 1.32s. Intraday price patterns look weak (bearish outside range session on the 6-hour chart), suggesting Cable may leak back to test short-term trend support at 1.3240. We see resistance at 1.3330 now."

Weak UK Wage Growth Pushes GBP Lower

The sluggish pace of UK wage growth continued in the three months to July, according to the latest data.

Average weekly earnings including bonuses grew 2.1% during the twelve week period; a pace unchanged on the previous reading and worse than the 2.3% increase expected.

Excluding bonuses, wages grew 2.1% as well, disappointing forecasts of a pick-up to 2.2%.

This has caused some concern amongst traders, who are worried about the outlook for consumer spending, given that real wages are shrinking even faster now overall inflation has accelerated back to 2.9%.

Bets that a rise in core inflation to a six-year high of 2.7% will prompt the Bank of England (BoE) into hiking interest rates soon, if not at tomorrow’s meeting, are helping prevent GBP/USD from falling too sharply.

Employment data seemed positive on the face of it, but analysts were worried that the surge in job creation and the surprise drop in unemployment was due to poor productivity forcing companies to take on more staff.

The employment change figure for the three months to July leapt from 125,000 to 181,000, easily beating forecasts of 154,000.

This pushed the ILO unemployment rate down from 4.4% to 4.3% against expectations of no change to the rate of joblessness.

Signs of Weaker-than-Expected Damage from Hurricane Irma Help USD Resist GBP Advance

Signs that Hurricane Irma is unlikely to have caused the levels of economic damage originally forecast has helped lift the US Dollar recently, although markets aren’t yet entirely convinced that the US economy will escape lightly.

Indeed, Goldman Sachs has now cut its forecasts for third-quarter GDP from 2.8% to 2%, estimating that Hurricane Irma will have caused -$30 billion of losses on top of the -$85 billion already caused by Hurricane Harvey last month.

Goldman Economist Spencer Hill commented; ‘The uncertainty around all of these figures is high, but there is little doubt that the combined impact of Harvey and Irma will be particularly severe. We continue to expect a sizeable drag from hurricanes on Q3 growth.’

However, other economists are predicting less damage, with Morgan Stanley expecting the hit from Irma and Harvey to be around -0.5%.

Meanwhile, JPMorgan Chase’s Michael Feroli doesn’t think the Federal Reserve is likely to make changes to interest rates before December anyway, so a blip in September is going to be of little consequence, stating;

‘The next realistic chance to adjust the funds rate is not until mid-December, and at that point we think some of the more noticeable disruptions from the data flow should be behind us.’

According to the CME Group’s FedWatch Tool, the Fed Funds futures market expects a 57.3% chance that the Federal Open Market Committee (FOMC) will vote to keep interest rates frozen at the current 1%-1.25% range.

GBP/USD Forecast; Will BoE’s Haldane Rejoin Team Hawk?

The Bank of England will announce its latest monetary policy decisions tomorrow.

If the Monetary Policy Committee (MPC) decides to leave interest rates on hold and signals that it will do so in the medium-term despite strong price growth, GBP/USD exchange rates are likely to fall sharply.

Market concerns will rise that the increasing strength of price growth, coupled with stubbornly-low wage growth, will further weigh on the UK’s economy, which has already seen growth slow to 0.3% so far this year.

However, high levels of inflation may see BoE Chief Economist Andy Haldane once again become more hawkish.

The last time inflation was at 2.9% Haldane stated that the risks of hiking too late now outweighed the risks of hiking too early, prompting markets to bet he would be the third member of the MPC to back monetary tightening.

Some poor data soon after prompted Haldane to move firmly back into the doves’ camp, but a return to strength for the CPI could coax a more hawkish attitude out of him again.

There will also be volatility from the other side of the pairing, with USD likely to react strongly to US consumer price index figures for August.
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