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GBP USD Exchange Rate Surges Higher Ahead of UK Wage Growth Data

April 16, 2018 - Written by Ben Hughes

Although the latest US advance retail sales data bettered forecast this failed to knock the Pound US Dollar (GBP/USD) exchange rate off an uptrend.

While the 0.6% uptick on the year reversed the -0.1% contraction seen in February the mood towards the US Dollar remained generally muted.

Confidence in the Pound, meanwhile, strengthened in anticipation of the latest round of technical meetings between UK and EU officials and talks on the issue of the Irish border.

With markets hopeful that the two sides will continue to progress towards an amicable agreement GBP exchange rates found fresh support, even in the absence of any particular developments.

UK Inflation and Wage Data Forecast to Boost Pound Exchange Rates

Further support is likely in store for the Pound this week, with the release of the latest wage growth and inflation data.

Markets hope to see evidence that the long-running wage squeeze is coming to an end, with forecasts pointing towards an acceleration in average weekly earnings in the three months to February.

If wage growth rises to 3.0% as anticipated this would give the Bank of England (BoE) encouragement, suggesting that the pressure on household finances is starting to ease once again.

Anything less than a significant downside disappointment is unlikely to alter market pricing for the odds of an imminent BoE interest rate hike, however.

As Jane Foley, Head of FX Strategy at Rabobank, noted:

‘Since the BoE turned clearly hawkish in September 2017, GBP has drawn support from expectations of higher interest rates. News in December of an EU/UK agreement on the legacy issues connected with Brexit and the subsequent confirmation of a deal regarding the post Brexit transition period have also supported Sterling.

‘While a May rate hike from the BoE is largely priced-in, the Pound may find further support if the MPC lean towards another rate hike in November. That said, we expect anxiety regarding the EU/UK trade talks to undermine the Pound on a 3 to 6 mth view. On a 12 mth view we expect GBP to rise on an anticipated free trade deal.’

Any negative developments in the latest Brexit-based discussions, however, could see the GBP/USD exchange rate return to a weaker footing this week.

Pound US Dollar Exchange Rate to Benefit From Geopolitical Tensions

A dip in the NAHB housing market index encouraged further selling of the US Dollar, slightly undermining confidence in the domestic outlook.

While this is unlikely to be enough to alter the prospect of an imminent Federal Reserve interest rate hike the weaker showing was still able to knock back USD exchange rates on Monday afternoon.

All in all, however, the outlook for the US economy remains generally optimistic.

Analysts at Nomura commented:

‘Facing strong momentum in aggregate demand, tightening labour markets, and some evidence of a rebound in inflation, we look for the Fed to hike four times in 2018 and two more times in 2019. We think the roll-off of the Fed balance sheet will gradually raise long-term interest rates. We do not believe that new Fed leadership will cause a material change in the near-term trajectory of monetary policy.

‘Financial conditions remain accommodative but recent market activity suggests they can turn quickly. The US and China escalated tit-for-tat threats of imposition of tariffs. At the moment, we continue to view these actions as opening positions for an eventual negotiated settlement between the US and China. However, the Trump administration’s aggressive stance raises the risk of a full-blown trade conflict between the two countries, in our view.’

If there is a fresh escalation in tensions between the US and China, or indeed Russia, this could weigh heavily on the appeal of the US Dollar.

While geopolitical tensions largely benefit safe-haven assets the potential damage to the US economy from any prospect trade war offsets any potential benefit to USD exchange rates.

With the White House accusing both China and Russia of currency manipulation the upside potential of the US Dollar could be somewhat limited in the near term.
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