December 20, 2018 - Written by James Fuller
STORY LINK GBP to USD Exchange Rate Tests Weekly Best as Federal Reserve Disappoints Markets
Despite the Federal Reserve taking a more hawkish than expected approach to US monetary policy during its December policy decision, this did more to spook markets than reassure them. As a result, the British Pound to US Dollar (GBP/USD) exchange rate actually advanced as investors digested the decision.
Since opening this week at the level of 1.2588, GBP/USD has trended with an upside bias. GBP/USD briefly dipped following the Federal Reserve’s policy decision on Wednesday, but as investors continued to digest the news the pair jumped and at the time of writing was trending near a weekly high of 1.2703.
GBP Exchange Rates Little Affected by Bank of England (BoE) Policy Decision
The Pound was driven more by lasting Brexit uncertainties and the strength of its rivals on Thursday. As a result, recently decent UK data and the Bank of England’s (BoE) December policy decision ultimately had little impact on the British currency’s movement.
Thursday saw the publication of Britain’s November retail sales results, which came in well above expectations. Monthly retail sales came in at 1.4% and yearly sales jumped from 2.4% to a strong 3.6%.
The data indicated that UK households were increasingly shopping around the Black Friday shopping event, rather than in the typical December Christmas shopping period.
It was followed by the Bank of England’s (BoE)
December policy decision, in which the bank left UK monetary policy frozen as was widely expected.
Notably, the BoE cut UK growth forecasts amid concerns over intensified uncertainty over the Brexit process. According to the bank’s meeting minutes:
‘The further intensification of Brexit uncertainties, coupled with the slowing global economy, has also weighed on the near-term outlook for UK growth. Business investment has fallen for each of the past three quarters and is likely to remain weak in the near term. The housing market has remained subdued. Indicators of household consumption have generally been more resilient, although retail spending may be slowing.’
Ultimately though, with Sterling already generally weak on broad uncertainties regarding how the Brexit process will unfold, the bank’s tone didn’t do much to influence the Pound outlook.
USD Exchange Rates Slide on Federal Reserve Spook
Signs that the global economy will slow down in the coming years don’t seem to have put the Federal Reserve off from planning to hike US interest rates even further in 2019.
Despite wide market anticipation that the Federal Reserve
would take a more cautious and data-focused outlook for US monetary policy next year, the Fed said it would continue to gradually hike US interest rates.
With markets now betting at least 2 US interest rate hikes in 2019, this spooked investors and concerns are rising that the Fed could hike US interest rates too high.
According to Jamie Cox, Managing Partner at Harris Financial Group in Richmond:
‘I think that markets were looking for more in terms of the pause,
‘It’s not as dovish as expected, but I do believe the Fed will ultimately back off even further as we move into the New Year.’
Essentially, concerns that the Federal Reserve could actually damage the US economy by hiking rates too high made investors sell the US Dollar on Thursday.
GBP/USD Exchange Rate Forecast: Slews of Key US Data Due Friday
Investors are anxious that the US and global economies will not be strong enough for the Federal Reserve to keep hiking US interest rates in 2019, but if upcoming US data impresses investors it could soften those concerns.
Friday will see the publication of US personal income and spending stats from November, as well as the PCE price index report.
Also notable will be the final US Q3 Gross Domestic Product (GDP) growth rate report, as well as Michigan University’s final December confidence survey figures.
If US data beats market expectations, the Pound to US Dollar exchange rate could shed some of its weekly gains.
However, if data disappoints or Federal Reserve jitters persist, the Pound to US Dollar exchange rate could be more likely to sustain its weekly gains.
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TAGS: Pound Dollar Forecasts