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Pound-to-Dollar Exchange Rates Benefit as Trump Criticises Federal Reserve Policy Tightening

December 18, 2018 - Written by Frank Davies

With the Federal Reserve (FED) coming under increasing pressure to pursue a more gradual pace of monetary tightening the Pound to dollar exchange rates recovered ground.

The appeal of the US Dollar diminished on Tuesday morning even as the general sense of market risk appetite dimmed in response to worries over the outlook of the global economy.

As the Trump administration continued to criticise the prospect of the Fed raising interest rates at its December policy meeting USD exchange rates were left on a weaker footing.

Even so, this intervention is unlikely to alter the outcome of the meeting, with a rate hike already fully priced into the US Dollar by markets.

Although Brexit-based uncertainty continued to dominate the outlook of the Pound, meanwhile, this was not enough to weigh down the GBP/USD exchange rate at this juncture.

Slowing US Construction Sector to Boost GBP/USD Exchange Rate

The mood towards the US Dollar may sour further if November’s US housing starts and building permits figures fail to impress.

Fresh evidence of weakness within the US construction sector could extend the losses of USD exchange rates, even though the sector is not the primary driver of the US economy.

With economic growth already showing signs of easing in the face of trade tensions and a slowing global economy any deterioration is likely to dent the US Dollar.

As building permits are expected to show another contraction on the month this looks set to fuel doubts over the health of the construction sector, offering the GBP/USD exchange rate a fresh boost.

Weaker UK Inflation Forecast to Dent Pound Sterling (GBP) Exchange Rates

Confidence in the Pound could fade on Wednesday, however, with the release of November’s UK consumer price index data.

Forecasts point towards a slight easing in the headline inflation rate from 2.4% to 2.3% on the year, even though the monthly reading is expected to show a modest uptick.

While this would improve the prospect of wage growth accelerating further in the months ahead a weaker reading would also give the Bank of England (BoE) incentive to leave interest rates on hold.

The prospect of greater BoE dovishness would leave GBP exchange rates exposed to fresh downside pressure, with domestic uncertainty already set to discourage policymakers in the months ahead.

As analysts at Danske Bank noted:

‘May also said that negotiations with the EU continue despite the EU having said that no further negotiations are planned and that the EU27 will not reopen the Withdrawal Agreement. It seems as if EU leaders will not change position until at least the UK politicians find out what they want. This makes good sense as it is not a given that the deal would survive in the House of Commons even with further concessions given the big divisions in British politics.’

On the other hand, if price pressures pick up on the year this could offer the Pound a fresh boost against its rivals.

US Dollar (USD) Exchange Rate Volatility Forecast on Fed Commentary

The GBP/USD exchange rate may gain further ground in the wake of the Federal Open Market Committee (FOMC) policy announcement on Wednesday.

If Fed policymakers take a more dovish turn this would leave the US Dollar vulnerable to another round of selling.

Evidence that the Fed is likely to pursue a more gradual pace of monetary tightening in 2019 may weigh heavily on USD exchange rates.

A negative revision to the FOMC dot plot would leave the US Dollar with little upside potential, especially if the US economy continues to demonstrate signs of vulnerability.

However, signs that policymakers maintain a greater degree of confidence in the outlook of the US economy may still limit the strength of the GBP/USD exchange rate.
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