GBP to USD Exchange Rate Slides as Investors Await US Growth Stats

October 27, 2017 - Written by Ben Hughes

STORY LINK GBP to USD Exchange Rate Slides as Investors Await US Growth Stats

Investors are becoming increasingly optimistic about the chances of a December Federal Reserve interest rate hike and are more uncertain about the possibility of a Bank of England (BoE) rate hike in November, which has caused the British Pound to US Dollar exchange rate to plunge.

At the time of writing this article, the GBP/USD exchange rate was trending at around 1.3090. The pair now trends well below the week’s opening level of 1.3185 despite reaching a high of 1.3276 on Thursday.

Pound (GBP) Held Back by Bank of England (BoE) Uncertainties

This week’s stronger-than-expected UK Gross Domestic Product (GDP) may not have been enough to keep bets of November interest rate hike from the Bank of England (BoE) high.

With the bank set to announce its November policy decision less than a week from now, investors remain anxious that Britain’s economy may not be strong enough to support higher rates.

A lack of clear guidance from BoE officials in recent sessions has added to that uncertainty.

Earlier in the week, BoE Deputy Governor Sir Jon Cunliffe indicated that the chances of a November rate hike remained an open question.

Without any further guidance from bank officials, the result is on track to be a surprise to markets, as many traders bet there will be a rate hike while many others bet rates will be left frozen.

Many analysts, such as Adam Cole from RBC Capital Markets, still believe the bank intends to hike UK interest rates in November’s meeting;

‘The main question for GBP (is) what happens to expectations for rates beyond November. Our economists have just reiterated their view... that November’s hike will be the only move in 2017/2018,’

However, other analysts believe that as Brexit concerns begin to hamper business activity, and the pay squeeze dampens retail activity, Britain’s economy just may not be resilient enough.

Due to this broad uncertainty, Pound trade has been weak and it has been easily pushed down by a stronger US Dollar.

US Dollar (USD) Supported by Hopes of Tax Reform Progress

The US Dollar has been buoyant in recent sessions, amid market hopes that US President Donald Trump’s proposals for tax reform are making progress and that some aspects of it could pass through US Congress before the end of the year.

On Thursday night, the US House passed a notable obstacle, narrowly but successfully passing the Senate’s budget blueprints. The plan passed by 216-212.

This has bolstered market hopes that the tax reform plans could see success, despite Congress issues with healthcare earlier in the year.

On top of tax reform hopes, the US Dollar is seeing resilient trade due to high expectations that the Federal Reserve will hike US interest rates in its December policy decision.

Overall, the US Dollar has seen bullish performance in recent sessions, as investors become more optimistic about the US economic outlook after months of uncertainty.

GBP/USD Forecast: US Growth Stats in Focus

The Pound to US Dollar exchange rate could still see some shifts in direction before markets close for the week, depending on some notable US ecostats due during Friday’s American session.

Q3’s quarterly US Gross Domestic Product (GDP) projection will be published and is forecast to have slowed from 3.1% to around 2.5%.

If the US growth projection for Q3 is even worse than expected, the US Dollar is likely to weaken as investors will become anxious that the US economic outlook is not as strong as hoped.

Michigan University’s final October consumer sentiment surveys will also be published, which could influence ‘Greenback’ demand slightly.

Next week, market focus is likely to turn towards the Bank of England (BoE), which will hold its November policy decision on Thursday.

If the BoE does hike UK interest rates as some analysts suspect, the Pound to US Dollar exchange rate is likely to surge.

On the other hand, a policy freeze from the BoE would likely leave the Pound much weaker.

Any news on US President Donald Trump’s pick for Federal Reserve Chair is also likely to influence the Pound to US Dollar exchange rate over the coming seven days.

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TAGS: Pound Dollar Forecasts