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GBP USD Exchange Rate Under Pressure as US Industrial Production Improves

April 17, 2018 - Written by Frank Davies

Although the UK unemployment rate unexpectedly fell to a fresh forty-two year low on Tuesday this failed to give the Pound US Dollar (GBP/USD) exchange rate a boost.

While the UK labour market continued to tighten this did not result in any particular uptick in average weekly earnings, which showed steady growth of 2.8% in the three months to February.

Even though this saw wage growth finally overtake inflation, albeit by just 0.1%, this was not enough to boost the appeal of the Pound at this stage.

Confidence in the US Dollar, meanwhile, strengthened on the back of a solid round of US industrial and manufacturing production data.

Pressure for GBP USD Exchange Rate Forecast on UK Inflation Data

While the UK average weekly earnings data fell short of forecasts this is unlikely to alter the outlook of the Bank of England (BoE), however.

Markets continue to anticipate a May interest rate hike from the central bank, in spite of the rather mixed signals that the domestic economy has sent in recent weeks.

As James Smith, Developed Markets Economist at ING, noted:

‘This latest pick-up also means that wages are now rising ever so slightly faster than inflation – which on the face of it, implies that the household squeeze has come to an end. Although, with consumer confidence still relatively low, we don’t think the economy is out of the woods just yet.

‘It’s worth repeating that these wage figures are still being flattered by the sharp slowdown seen at the start of 2017. And while the recent momentum has undoubtedly been encouraging, it has slowed a touch over the past couple of readings (the 3M/3M annualised rate of growth has eased back to 2.6% from 3.1% previously).

‘Having said that all that, we suspect policymakers will remain fairly comfortable with wage growth.’

Tomorrow’s UK consumer price index data could offer the GBP/USD exchange rate a stronger rallying point, though, if inflation shows fresh signs of picking up.

With inflation still running far in excess of the BoE’s 2% target another high reading should cement the prospect of an imminent interest rate hike further.

On the other hand, if price pressures eased on the year this may give investors fresh incentive to sell out of the Pound.

Stronger US Production Data Boosts Odds of Aggressive Federal Reserve Tightening

Signs from the US economy proved a little more encouraging on Tuesday, suggesting that growth remains fairly solid at the end of the first quarter of 2018.

As James Knightley, Senior Economist at ING, commented:

‘US industrial production has beaten expectations again, rising 0.5% MoM in March versus the consensus forecast of 0.3%. This follows a 1% rise in February.

‘The outlook remains positive given the robust domestic economy and a competitive exchange rate that allows US exporters to really benefit from the upturn in global demand.

‘It is important to remember that manufacturing output is still 5% lower than a decade ago while manufacturing employment is down 7.5%.

‘Trade tensions remain a clear risk while problems obtaining commodities (aluminium market in particular following an extension of Russian sanctions) could create bottlenecks in the near term.’

A surprise uptick in the latest capacity utilisation figure also boosted demand for the US Dollar, improving hopes that the Federal Reserve will opt to take a more aggressive pace of monetary tightening this year.

Even so, markets will still be keen to hear from Fed policymakers over the coming days in order to better gauge the odds of the central bank raising interest rates three more times in 2018.

If policymakers take a more cautious stance this could offer support to the GBP/USD exchange rate.

Focus will also fall on global political developments, with any escalation in tensions over Syria likely to provoke further volatility for USD exchange rates.
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