Hawkish Statements from Fed?s Powell Push US Dollar to Pound Rate Higher

October 5, 2017 - Written by David Woodsmith

STORY LINK Hawkish Statements from Fed?s Powell Push US Dollar to Pound Rate Higher

On Wednesday, the US Dollar advanced slightly against the Pound, from a starting rate of 0.7539 to close at 0.7556.

US Dollar Advances after Trio of Fed Speeches

Three Federal Reserve officials have recently spoken, facilitating a clear US Dollar to Pound rise.

The USD GBP exchange rate has risen by as much as 0.7%, thanks to general optimism among traders.

The most cautious of the recent speakers has been John Williams, who has warned that the US could be stuck at 1.5% growth in the coming years.

Giving a neutral outlook, his colleague Patrick Harker has said that;

‘Until we see some other changes on the fiscal side of the house, we’re not going to move [the US] growth rate too much’.

In essence, this means that the pressure is now on the US government instead of the Fed to trigger economic expansion.

Finally and most hawkishly, Jerome Powell has warned against policy overregulation. Powell is tipped by some to become the next Fed Chair, so his comments have been of great interest to USD traders.

Pound Slides on Car Sales and Conservative Woes

The Pound has been roundly battered by poor domestic data today, in addition to mounting concerns about a brawl breaking out among the Conservatives.

In the former case, UK new car sales have been reported down in September. On the year, sales dropped by -9.3% from a prior -6.4%.

While car sales are not usually a point of focus for economists, in the present political climate all negative news is considered in relation to November’s budget statement.

Giving a rather gloomy summary has been Financial Times Economics Editor Chris Giles. Highlighting the problems faced by Chancellor Philip Hammond in next month’s budget announcement, Giles said;

‘Hammond is facing what officials describe as “a bloodbath” in the public finances in his Budget next month as weak economic forecasts derail the government’s plans.

As much as two-thirds of the £26bn of headroom in the public finances that the chancellor created last year as a buffer for the economy through the Brexit period is likely to be wiped out after the government’s fiscal watchdog concludes its forecasts for growth have been too optimistic.

The Office for Budget Responsibility will publish on Tuesday a new analysis suggesting it has persistently over-estimated Britain’s productivity over the past seven years and will give a broad hint that it will rectify the situation with a more pessimistic Budget forecast.

Slower growth in the forecast will limit deficit reduction and cut the size of the war chest that Mr Hammond put aside to smooth the Brexit transition.

This leaves him in an awkward position politically, since he is under increasing pressure to end the austerity cap on public pay, lower the burden of debt on students and build houses’.

Looking at the Conservative issue, there have been growing concerns that there could be a struggle for the party (and national) leadership in the near-term.

Ever since Theresa May’s problematic conference speech on Wednesday, there has been swirling speculation that a challenge will be made against her.

Such concerns have understandably put traders off the Pound, given the high risks involved at the present time. It is worth remembering that the PM could tough it out, however, as the BBC’s Laura Kuenssberg states. Kuenssberg has looked at the reasons not to oust May, saying;

‘First, with Brexit negotiations under way so any change of leader could be destabilising at a time when the UK needs to look strong.

Second, Tory MPs don't agree on who a natural successor is and a leadership election could open a Pandora's Box with untold consequences.

Third, many Tory MPs are terrified of a general election. Doing anything that could precipitate a national contest means their jobs are at risk’.

USD GBP Outlook: Will US Dollar Strengthen on Fed Speech?

While it has been trading well against the Pound today, there is a chance for the US Dollar to make greater gains in the near-term.

Federal Reserve official Esther George will make a speech tonight and may touch on future monetary policy decisions.

If George appears to back the idea of a December interest rate hike, the US Dollar could firm decisively against the Pound.

With little notable UK data out on Friday, traders will keep their eyes on the US during the afternoon. High-impact data will consist of the jobless rate and non-farm payrolls stats, as well as further Fed speeches.

The payrolls figure has a history of rising sharply, so it is possible that the US Dollar could appreciate if more jobs are added than first expected. Economists believe the unemployment rate will stay put, at 4.4%.

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TAGS: Dollar Pound Forecasts