Disappointing UK Data Leaves GBP USD Exchange Rate in Sharp Slump

September 29, 2017 - Written by Frank Davies

STORY LINK Disappointing UK Data Leaves GBP USD Exchange Rate in Sharp Slump

The latest raft of UK data failed to inspire confidence amongst investors, prompting the Pound US Dollar exchange rate to extend its slump further.

Markets were disappointed by an unexpected downwards revision to the second quarter UK gross domestic product, which was lowered from 1.7% to 1.5%.

While the quarterly figure held steady this still suggests that the domestic economy has continued to lose momentum, dampening the appeal of the Pound.

Sterling did pick up somewhat in response to the close of the latest round of Brexit negotiations, as UK and EU officials indicated that some degree of progress has been made.

However, as European Commission President Jean-Claude Juncker later commented that talks will not have made enough progress by October to begin the second phase this quickly reversed any Pound gains.

With several months of the two-year negotiating timeframe already gone this naturally raises concerns that the UK may not be able to complete talks before its departure from the EU.

USD Forecast to Extend Gains on Rising US Inflation

Confidence in the US economy, meanwhile, strengthened somewhat in response to a stronger-than-expected annualised second quarter gross domestic product figure.

As the 3.1% rate of growth suggests that the world’s largest economy is still in a robust state of health this supported demand for the ‘Greenback’.

The more hawkish tone of recent comments from Federal Reserve Chair Janet Yellen also increased the odds of an imminent interest rate hike.

Yellen’s warning that there is a risk in ‘moving too gradually’ encouraged hopes that the Fed will continue its monetary tightening cycle and deliver another rate hike before the end of the year.

This naturally improved the appeal of the US Dollar, putting pressure on the GBP USD exchange rate.

Fresh noises over the prospect of tax reform from the Trump administration also encouraged investors to pile back into the ‘Greenback’, even though it remains questionable whether these promises will ever be delivered.

The mood towards the US Dollar could sour this afternoon, however, if August’s personal consumption expenditure data fails to impress.

Any softness in the Fed’s preferred inflationary measure could undermine the prospect of an imminent rate hike, to the detriment of USD exchange rates.

Even so, as Viraj Patel, research analyst at ING, noted:

‘Core PCE inflation – the Fed's preferred price pressure gauge – will be the key release to watch out for; markets are looking for a small uptick in underlying US inflation dynamics to 1.5%, though any miss would question the current 65-70% market-implied probability of a Dec Fed rate hike. While we see this as a bit of a headwind – for the broader $ impact, we encourage investors to look beyond Dec; here we point to the downgrade of the Fed's long-run dot last week and greater uncertainty over pace and extent of future tightening. The idea that we may well be entering the latter stages of the current Fed tightening cycle – and that further rate hikes will be shallower and more limited in scope – means that chasing USD strength on any Fed tightening hopes is unlikely to be a profitable medium-term strategic play.’

Another strong showing here, though, could still see the GBP USD exchange rate slump further ahead of the weekend.

Weaker UK PMIs Could Dent BoE Rate Hike Odds

Demand for the Pound could pick up in the coming week, however, if September’s UK PMIs offer fresh cause for confidence in the domestic economy.

Any signs that economic activity is strengthening in spite of persistent Brexit-based uncertainty are likely to be greeted by investors.

However, as forecasts point towards a modest softening across the board in September the GBP USD exchange rate could see fresh losses in the near term.

Weaker data could diminish the case for the Bank of England (BoE) to raise interest rates in November or December, particularly after the disappointing increase in net consumer credit.

With markets already pricing in relatively high odds of a 2017 BoE rate hike this may weigh heavily on the Pound.

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TAGS: Pound Dollar Forecasts