GBP to USD Exchange Rate Steadies with Thursday Bank of England (BoE) Meeting in Focus

February 6, 2018 - Written by Toni Johnson

STORY LINK GBP to USD Exchange Rate Steadies with Thursday Bank of England (BoE) Meeting in Focus

Poor UK data and strong US data has made it easier for the US Dollar to take advantage of Sterling weakness, leaving the British Pound to US Dollar exchange rate lower. The pair lost over a cent on Monday and on Tuesday saw narrower trade amid a lack of fresh notable data.

Following fluctuations last week, the GBP/USD exchange rate could be on track to see larger losses this week unless the Bank of England (BoE) takes a more hawkish tone on Thursday. GBP/EUR opened this week at the level 1.4121 and has since fallen to a fortnight low of 1.3942 and has since trended near those lows.

GBP Remains Limp Following Monday Tumble

The Pound (GBP) slumped against the US Dollar on Monday, as investors reacted to the latest UK ecostats and Brexit uncertainties.

Monday saw the publication of Markit’s January UK services PMI, which came in well short of 54.3 expectations and slowed from 54.2 to 53.0.

As the services report rounded off a triple whammy of underwhelming UK PMIs for January, the composite print also disappointed investors. The figure was forecast to slow from 54.9 to 54.6 but instead fell to 53.5.

According to Chris Williamson, Chief Economist at IHS Markit;

‘The softer service sector growth follows news of the manufacturing upturn losing momentum at the start of the year and a near-stagnant construction sector. All together, the PMI surveys point to the slowest pace of expansion since August 2016.

While the fourth quarter PMI readings were historically consistent with the economy growing at a resilient quarterly rate of 0.4-0.5%, in line with the recent GDP estimate, the January number signals a growth rate of just under 0.3%

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The January slowdown pushes the all-sector PMI into dovish territory as far as Bank of England monetary policy is concerned, historically consistent with a loosening bias. With the survey also indicating weaker upward price pressures, the data therefore cast doubts on any imminent rise in interest rates.’

On top of this, investors were also concerned by the latest headlines regarding the Brexit process.

Officials from the UK and EU have indicated it is highly unlikely that Britain will remain in the customs union following Brexit. This would mean that UK-EU trade would see major barriers regardless of what kind of post-Brexit deal is reached.

USD Supported by Strong US Ecostats and Higher Fed Rate Hike Bets

The US Dollar’s recent bearish run appears to have come to an end, as the currency was boosted on Friday by impressive US Non-Farm Payroll data and bolstered further on Monday by ISM’s latest impressive PMI data.

Friday’s Non-Farm Payroll report beat expectations in many prints, including the yearly wage growth rate. As a result, markets became more confident that the Federal Reserve would tighten US monetary policy at a more aggressive rate in 2018 and Fed rate hike bets rose.

ISM’s January non-manufacturing PMI was published on Monday and impressed investors too. The figure was forecast to have improved from 55.9 to 56.5, but instead jumped to 59.9. The previous figure was revised to 56.0.

Market risk-off movement helped the US Dollar to sustain its recent gains, as a selloff of stock in recent sessions has left investors hungrier for ‘safe haven’ assets like the US Dollar.

GBP/USD Forecast: Bank of England (BoE) Decision in Focus

The Pound to US Dollar (GBP/USD) exchange rate is likely to fluctuate within a relatively narrow region on Wednesday amid a lack of fresh notable data due for publication, with investors instead anticipating Thursday’s highly anticipated Bank of England (BoE) policy decision.

Analysts expect the Bank of England (BoE) to leave monetary policy frozen in its February decision, but any signs that the bank could change its tone in the coming months is likely to have a notable impact on Pound movement.

If the bank indicates that it will take action in the coming year to tackle high UK inflation, the Pound is likely to see stronger demand as BoE interest rate hike bets rise.

However, if the bank expresses caution on Britain’s economic outlook following recent disappointing PMIs, the Pound to US Dollar exchange rate could see further weakness towards the end of the week.

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TAGS: Pound Dollar Forecasts