USD GBP Exchange Rate Struggles to Capitalise on UK Budget Worries

November 22, 2017 - Written by Frank Davies

STORY LINK USD GBP Exchange Rate Struggles to Capitalise on UK Budget Worries

Anticipation for the latest UK Budget has kept the US Dollar Pound exchange rate on a narrow trend this week, with Chancellor Philip Hammond seen to have little room for manoeuver.

As the Budget is unlikely to offer any particular economic stimulus, given the current sticky state of the UK’s finances, the mood towards the Pound is likely to deteriorate further over the course of the day.

Demand for the ‘Greenback’, on the other hand, looks set to remain solid ahead of the release of the Federal Reserve’s November meeting minutes.

With markets already pricing in high odds of the Fed raising interest rates once again in December, however, the upside potential of the USD GBP exchange rate could be somewhat limited in the near term.

Limited US Dollar Movement Expected on Fed Minutes

No real developments are expected from tonight’s Fed minutes, though, due to the relatively dull nature of the November policy announcement.

As analysts at HSBC noted:

‘Do not expect any major surprises to come from the minutes of the 31 October to 1 November meeting.

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‘The policy statement released in November described economic activity as "solid", despite the recent hurricanes. In addition, the statement noted that inflation was expected to remain below 2% in the near term but to stabilise around the 2% target over the medium term.

‘In recent weeks, many Fed policymakers have said that they are watching inflation closely. Even so, a number of these officials have expressed the view that they would likely be willing to support a rate hike in December.

‘The November statement had little new to say about the balance sheet normalisation programme initiated by the Fed in October. However, the minutes of the meeting are likely to show some discussion by the Fed staff and policymakers regarding how the programme is proceeding so far.’

However, markets will still be looking to see whether policymakers continued to prepare the ground for a December rate hike as expected.

So long as the general tone of policymakers remains upbeat, pointing towards imminent tightening action, then USD exchange rates are likely to remain well supported.

Some US Dollar volatility could be in store on the back of the provision October durable goods order data, though.

As forecasts point towards a slowdown in orders this could put some pressure on the USD GBP exchange rate this afternoon.

Even so, anything short of a significant downside surprise is unlikely to impact the case for a December rate hike, limiting any potential ‘Greenback’ weakness.

Downgrade to OBR Forecasts to Weigh on Pound Exchange Rates

The major catalyst for USD GBP exchange rate movement in the short term, however, will be Hammond’s Budget announcement.

This is a crucial moment for the Chancellor, with Brexiteers already regarding the more cautious-minded Hammond as an obstacle to be removed.

If the Budget fails to deliver a sense of greater unity within Theresa May’s cabinet, or prompts another embarrassing U-turn, then Hammond’s tenure with the Treasury could well be cut short.

Such a development would be negative for the Pound, given that the City and markets at large prefer the current Chancellor to the prospect of a more hard-line cheerleader of Brexit.

On the other hand, as long as the Budget proves to be relative uncontroversial this should limit the downside pressure on GBP exchange rates.

However, as analysts at Lloyds Bank commented:

‘The greater focus will be on the impact on borrowing over the coming years resulting from downgrades to UK GDP projections. In a recent speech, the chairman of the Office for Budget Responsibility (OBR), Robert Chote, noted that their assessment of the UK’s productive potential had previously been too optimistic and that the OBR was minded to "significantly" revise down its productivity growth assumptions. That should be reflected in higher borrowing across the forecast horizon.’

If the OBR downgrade is indeed significant this could weigh heavily on the Pound, further denting the outlook for the UK economy in the coming months.

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TAGS: Pound Dollar Forecasts