Rising Hopes for 2018 US Interest Rate Hikes Causes Pound to US Dollar Exchange Rate Losses

February 27, 2018 - Written by Tim Boyer

STORY LINK Rising Hopes for 2018 US Interest Rate Hikes Causes Pound to US Dollar Exchange Rate Losses

During Monday’s trading session, the Pound to US Dollar exchange rate ultimately remained close to its opening levels, having started in the area of 1.3966 and finished around 1.3965 by the evening.

Despite this apparent lack of movement, the GBP/AUD exchange rate did rise to a daily high of 1.4060 during the day, but failed to sustain this favourable trading.

The Pound saw some initial appreciation on Bank of England (BoE) news, when it was reported that BoE policymaker Dave Ramsden had changed his outlook on UK interest rate hikes.

Mr Ramsden has previously spoken against raising UK interest rates too soon, but in his latest remarks appeared to reverse this outlook.

In comments published in the Sunday Times, Mr Ramsden said;

‘We all will keep a close eye on what happens through the early part of this year to see if that (BoE) forecast of wage growth picking up to 3% is realised.

But certainly relative to where I was, I see the case for rates rising somewhat sooner rather than somewhat later’.

UK domestic data was limited during the day, with the only notable announcement being that national mortgage approvals had risen in January.

This was presumed to be a positive sign by traders, who interpreted the data as meaning that more approvals indicated economic resilience across the country.

US Dollar movement on Monday was mainly dictated by speculation about Federal Reserve Chair Jerome Powell, who has been giving testimony today.

Traders were uncertain of whether Powell would support a faster pace of interest rate hikes in 2018 under his leadership, but the US Dollar still appreciated on cautious optimism.

Late on Monday, Federal Reserve official Randal Quarles gave a speech, delivering an optimistic assessment of the US economy. Mr Quarles said;

‘I am fairly optimistic about the current state of the economy.

Along many dimensions, it has been quite some time since the economic environment has looked as favourable as it does now.

With my current economic outlook, I anticipate that further gradual increases in the policy rate will be appropriate to both sustain a healthy labour market and stabilize inflation around our 2% objective’.

Pound to US Dollar Daily Update: GBP/USD Exchange Rate Slumps after Strong Fed Message

The Pound has fallen by -0.6% against the US Dollar today; this is mainly down to a strong USD significantly lowering demand for Sterling.

In UK news, a focus on national trade agreements after Brexit has dominated the headlines, putting additional pressure on the Pound.

Trade Secretary Liam Fox has warned that remaining in an EU customs union will impair the UK’s ability to make trade deals in the future.

This view has been argued against by a former Trade department official, Sir Martin Donnelly, who has cautioned that if there is no trade deal;

‘You’re giving up a three-course meal, the depth and intensity of our trade relationship across the European Union and partners now, for the promise of a packet of crisps in the future’.

US Dollar to Pound Rate Rallies after Stable Statements from Fed Chair Powell

The most anticipated event of the week for USD traders has met up to expectations, resulting in traders buying in and the US Dollar to Pound exchange rate rising.

In his debut before Congress, new Federal Reserve Chair Jerome Powell has outlined his plans for the US central bank, which have been received positively by USD traders and economists.

Speaking earlier on Tuesday, Mr Powell said;

‘While many factors shape the economic outlook, some of the headwinds the US economy faced in previous years have turned into tailwinds.

In particular, fiscal policy has become more stimulative and foreign demand for US exports is on a firmer trajectory.

Despite the recent volatility, financial conditions remain accommodative. At the same time, inflation remains below our 2% longer-run objective.

In the Federal Open Market Committee’s view, further gradual increases in the federal funds rate will best promote attainment of our objectives.

As always, the path of monetary policy will depend on the economic outlook as informed by incoming data’.

While in essence a cautious statement, this outlook has still raised trader hopes for three or potentially four US interest rate hikes in 2018.

Pound to US Dollar Exchange Rate Forecast: Further GBP Losses Possible on Falling UK Confidence Score

The Pound may extend its losses against the US Dollar on 28th February, when the GfK consumer confidence reading for February comes out.

This is tipped to show a drop in consumer confidence, which was already negative at -9 points in December 2017.

There will be further testimony from Jerome Powell this week, but before then the US Dollar is likely to be shifted by GDP growth rate data out on 28th February.

If the quarter-on-quarter reading shows slower growth as predicted, the US Dollar to Pound exchange rate could fall.

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TAGS: Pound Dollar Forecasts