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GBP USD Exchange Rate Accelerates on Rising US Jobless Claims Figures

April 12, 2018 - Written by James Fuller

Even though March’s Federal Open Market Committee (FOMC) meeting minutes proved a little more hawkish in tone this failed to knock the Pound US Dollar (GBP/USD) exchange rate off an uptrend for long.

The minutes were not particularly surprising, given the recent trend of solid US data and rising inflationary pressure.

All in all, the Fed still looks to be on track to raise interest rates again in the coming months.

As analysts at Danske Bank noted:

‘There are a few things worth highlighting: (1) The Fed says trade policy poses a downside risk to the US economy, (2) the Fed thinks the expansionary policy will boost growth over the next years but thinks it is difficult to estimate the magnitude, as the output gap is already nearly closed, (3) 'several' Fed members think it is likely necessary to increase the Fed funds rate above the natural/neutral rate over the next couple of years to avoid overheating the economy and (4) the Fed will continue to shrink its balance sheet despite the USD liquidity situation.

‘We still expect two more hikes this year with risk skewed towards three more hikes. The next hike will most likely come at the June meeting.’

However, the US Dollar failed to capitalise on this as the impact of a further two interest rate hikes has already been largely priced into USD exchange rates.

Pound Gains Limited by Stagnating RICS House Price Balance

Even so, the GBP/USD exchange rate struggled to gain any particular traction in the wake of more disappointing UK data.

Investors were not impressed to find that the RICS house price balance had stagnated once again in March, signalling persistent weakness within the domestic housing market.

The appeal of the Pound was further dented as the Office for National Statistics revealed that annual household savings fell to their weakest level in a decade last year.

As the cash-based savings ratio slumped from 2.9% in 2016 to just 09% in 2017 this eroded confidence in the economic outlook.

Weaker levels of household savings leave the economy more vulnerable in the event of a downturn, with consumer spending looking increasingly fuelled by debt.

Charles Haresnape, Chief Executive of Gatehouse Bank, commented:

‘It is 2018 and yet, from a savings perspective, things are as bad in many respects as 2008.

‘The fact that savings levels haven’t been this low since the global financial crisis exploded a decade ago is a worrying sign. Rising prices have hit disposable income hard. Importantly, these ONS statistics reflect cash in purses and wallets, namely how people really feel about their spending and saving power on the ground.

‘What they show is a marked deterioration that is unlikely to be offset by modest dips in inflation like the one we saw in February.

‘Also weighing on people’s minds will be house prices, which are not consistently keeping up with inflation. So many homeowners, emboldened to borrow by healthy rises in recent years, are all too aware now that their house is not the piggy bank it used to be.

‘There’s limited wiggle room to save and fewer reasons to borrow.’

With markets still speculating over the likelihood of the Bank of England (BoE) raising interest rates once again in May this underwhelming data was not greeted with any particular positivity.

Underwhelming US Data Limits GBP/USD Exchange Rate Downside

Higher-than-forecast US initial and continuing jobless claims figures offered some support to the GBP/USD exchange rate, meanwhile.

With signs pointing towards the persistence of slack within the US labour market the odds of the Federal Reserve adopting a more aggressive pace of monetary tightening appeared to diminish.

A weaker import price index offered further encouragement to the GBP/USD exchange rate, even though this is unlikely to particularly alter the inflationary outlook at this stage.

The US Dollar could soften further ahead of the weekend if the University of Michigan consumer sentiment index weakens as forecast.

Political developments will also remain a key influence on USD exchange rates in the near term, with geopolitical tensions having the potential to dent demand.
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