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Pound US Dollar Exchange Rate Recovers Ground on Positive UK Trade Data

November 10, 2017 - Written by David Woodsmith

A generally better-than-expected raft of UK trade and production data offered the Pound US Dollar exchange rate support ahead of the weekend.

Markets were pleasantly surprised to find that September’s visible trade deficit had narrowed to -11.2 billion, rather than the -12.8 billion that had been forecast.

While a significant degree of this improvement was driven by an increase in exports to the EU this was nevertheless enough to offer the Pound something of a boost.

Coupled with another strong monthly uptick in both manufacturing and industrial output this suggests that the UK economy ended the third quarter on a relatively robust footing.

However, the GBP USD exchange rate still struggled to make any particular upside gains on Friday morning as Brexit-based uncertainty continues to hang over the UK outlook.

GBP Exchange Rate Volatility Forecast on UK Wage and Inflation Data

Worries over Brexit and the stability of Theresa May’s government are likely to remain a major headwind for Sterling in the coming week.

Even so, GBP exchange rates could strengthen on the back of October’s UK consumer price index data.

Another uptick in inflationary pressure would vindicate the Bank of England’s (BoE) decision to raise interest rates at its November meeting, also boosting the odds of further policy tightening over the coming months.

However, as Viraj Patel, Foreign Exchange Strategist at ING, noted:

‘Next week's UK data splurge – which includes the latest CPI, jobs, wage growth and retail sales releases – is unlikely to be game-changing for the BoE's policy outlook, although some positive surprises may see sentiment for a second rate hike resurface. (…) While it is understandable that the MPC are reluctant to show their policy hand amid this crucial period of Brexit talks, we do think the dovish repricing of BoE policy expectations within markets has been a tad excessive.’

Wednesday’s average weekly earnings figure could put pressure on the GBP USD exchange rate if it indicates that the ongoing wage squeeze is continuing to worsen.

With consumers already showing signs of reining in their spending, in response to wage pressures and deteriorating confidence, another poor showing here could weigh heavily on the Pound.

As the BoE expressed optimism in the wage growth outlook when it opted to raise interest rates any persistent weakness is likely to discourage investors, putting pressure on policymakers to leave rates on hold.

Tax Reform Delays Limit US Dollar Strength

Increasing doubt over the Trump administration’s ability to deliver on its promised tax reforms in the near future somewhat dampened the appeal of the US Dollar this week.

As Patel commented:

‘In a nutshell, the Senate has pretty much taken out any of politically contentious tax policies – with the corporate tax rate cut to 20% delayed till 2019 (as opposed to the House’s intent for instant enforcement). Moreover, Senators remain wary that drastic changes still need to be made in order to adhere to their more stricter fiscal rules, such that the tax bill can be voted through with a simple majority. With the Congress week-long Thanksgiving recess starting next Friday, the odds of a GOP tax plan landing on President Trump’s desk this side of Xmas remain slim-to-none. A growing realisation of this will see the $ slide even lower.’

Even so, the ‘Greenback’ is likely to find fresh support this afternoon as the University of Michigan confidence index is forecast to have picked up once again in November.

Further signs of optimism within the world’s largest economy should give investors incentive to buy into the US Dollar.

However, as the impact of a December interest rate hike from the Federal Reserve has already been effectively priced into USD exchange rates any upside potential is somewhat limited at this juncture.

Volatility could also be in store on the back of October’s monthly Budget Statement, with investors unlikely to greet any indication that US finances have weakened.

On the other hand, if the budget proves positive this could see the GBP USD exchange rate return to a downtrend going into the weekend.
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