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Pound US Dollar (GBP/USD) Exchange Rate Benefits as Fed Turns Cautions on Interest Rates

January 31, 2019 - Written by Frank Davies

Cautious Federal Reserve Outlook Boosts Pound Sterling US Dollar (GBP/USD) Exchange Rate

The Pound Sterling to US Dollar (GBP/USD) exchange rate recovered ground in the wake of the Federal Reserve’s first policy announcement of 2019.

As the Fed signalled a willingness to leave interest rates on hold for longer, pausing its recent tightening cycle, the appeal of the US Dollar diminished.

With the Fed looking set to take a more cautious approach in 2019 the upside potential of USD exchange rates diminished.

Investors were caught slightly off guard by the extent of policymakers’ shift in tone, with the Fed dropping the reference to ‘further gradual increases’ made at its previous meeting.

This encouraged the US Dollar to trend lower across the board on Thursday morning as confidence in the outlook of the US economy continued to diminish.

Pound Sterling (GBP) Exchange Rates Lose Momentum as UK House Price Growth Hits Six-Year Low

However, the Pound also came under some pressure thanks to the disappointing nature of the latest Nationwide house price data.

As growth in house prices fell to its lowest level since February 2013 the mood towards the Pound naturally soured.

With the risk of a no-deal Brexit already deterring house buyers the outlook for the housing market appears rather bearish in nature.

Coupled with another weak month on the GfK consumer confidence index this underwhelming performance limited the gains of the GBP/USD exchange rate on Thursday morning.

Although the initial negative impact of Tuesday’s parliamentary votes on Brexit faded an air of uncertainty continued to weigh on the Pound, with the chances of a new deal on the Irish border issue still looking slim.

Underwhelming US Labour Market Report Forecast to Limit US Dollar (USD) Exchange Rate Strength

Ahead of the weekend the US Dollar could weaken further if January’s non-farm payrolls report fails to paint a solid picture of the US labour market.

While the headline unemployment rate is forecast to hold steady at 3.9% investors still expect to see a smaller increase in payrolls.

Any indication that the labour market is failing to tighten further could drive USD exchange rates into a fresh slump on Friday afternoon.

If growth in average hourly earnings also eases this is likely to add to the case for the Federal Reserve to leave monetary policy on hold for longer, to the detriment of the US Dollar.

Unless the ISM manufacturing index shows a solid month of acceleration the GBP/USD exchange rate is likely to gain ground on the back of US Dollar softness.

Softening UK Manufacturing PMI to Dent Pound Sterling (GBP) Exchange Rates

Even so, GBP exchange rates could falter if the UK manufacturing PMI shows signs of a slowdown.

Evidence that the UK manufacturing sector started 2019 on a weaker footing could put renewed pressure on the GBP/USD exchange rate.

While the manufacturing sector is not the main contributor to the UK gross domestic product any loss of momentum here could still weigh heavily on the health of the wider economy.

However, any uptick in the headline index may fuel a fresh boost for the Pound on Friday.

Resilient sector growth in the face of mounting Brexit-based uncertainty could shore up the GBP/USD exchange rate in the short term.
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