GBP to USD Exchange Rate Climbs as ?Safe Haven? Appetite Falls

January 4, 2018 - Written by Minesh Chaudhari

STORY LINK GBP to USD Exchange Rate Climbs as ?Safe Haven? Appetite Falls

Despite some strong US data and concerns that Britain’s economic activity could slow further in 2018, the British Pound to US Dollar exchange rate advanced on Thursday afternoon. Sterling benefitted from weaker demand for ‘safe haven’ currencies like the US Dollar as the global growth outlook improved.

Following advances in November and December, GBP/USD has continued its climb in the first week of 2018. On Wednesday the pair touched on a one-year-high of 1.3611 but generally trended near the level of 1.3550 on Thursday, still around half a cent higher than the week’s opening levels.

GBP Benefits Slightly from Rising UK Services Stats

While this week’s data has done little to improve the long-term Pound outlook and investors remain highly anxious about the remainder of the Brexit negotiations as well the Brexit process itself, Sterling still found some support on Thursday’s UK services PMI.

Markit’s UK services report was forecast to improve from 53.8 to 54.1 in December, but instead climbed to a better than expected 54.2. The composite figure remained at 54.7.

The data was seen as an indication that Britain’s services sector, which includes retail, had been more resilient than expected towards the end of 2017 despite slowing wage growth and surging inflation since the Brexit vote in 2016.

Some analysts, including Markit chief economist Chris Williamson, did point out however that the services outlook was filled with uncertainties amid the Brexit process, with some clients hesitating to spend.

The latest Bank of England (BoE) consumer credit report backed up this analysis due to an unexpected decrease in consumer borrowing, hinting that households were reining in spending.

Still, while the Pound has struggled against some rivals like the Euro (EUR) it has seen notable gains against the US Dollar in recent months.

Some analysts believe this is due to generally higher optimism towards the options of the Brexit process. According to John Marley from Infinity International;

‘Sterling held up well, and we have a window of ‘Brexitless’ trading until March and the resumption of talks while it also seems that support for a second referendum is starting to grow, especially in the parliamentary parties,’

USD Fails to See Sustained Rebound from Federal Reserve Minutes

While the US Dollar briefly saw stronger demand on Wednesday as investors digested the latest Federal Reserve meeting minutes report, its gains were limited and GBP/USD began to advance again on Thursday.

The US Dollar became more appealing following the Fed minutes, which indicated that the Fed was still on track to hike US interest rates multiple times in 2018. The minutes also hinted that the new US tax cuts would help to boost the US economic outlook.

On top of this, recent US data has been strong too. Wednesday saw the publication of an impressive manufacturing report from ISM while Markit’s services and composite PMIs beat expectations on Thursday.

December’s employment change data from ADP impressed too, coming in at 250k rather than the predicted 190k.

However, due to the strength of its rival the Euro (EUR) as well as a generally strong global growth outlook, the US Dollar eventually resumed the downtrend it has seen in recent weeks with ‘safe haven’ currencies like the US Dollar becoming less appealing.

According to Stephen Gallo from BMO Capital Markets;

‘This is just a continuation of the trend we saw into year-end, which was a weaker Dollar,

We have decent expectations for global growth and global risk assets and, when you have above-potential global growth, the dollar tends to weaken because people don’t need to hold safe-haven Dollars.’

GBP/USD Forecast: US Non-Farm Payroll Report Ahead

While there won’t be much highly influential UK data published over the next week, besides November’s trade balance report next Wednesday, Friday’s US data could still inspire movement in the Pound to US Dollar exchange rate.

December’s US Non-Farm Payroll report will be published during the American session, and if it beats expectations it could boost hopes that the Fed will increase its pace of interest rate hikes in 2018.

The unemployment rate is currently forecast to remain at 4.1%.

If the job data simply meets expectations however, GBP/USD could end the week higher as investors continue to sell the US Dollar.

Pound trade is likely to become more focused on Brexit news again in the coming sessions, especially as UK Parliament will reconvene next week. Any hints towards the UK government’s stance on UK-EU trade negotiations could impact Sterling.

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TAGS: Pound Dollar Forecasts