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GBP to USD Exchange Rate Falls Back from Fortnight Best as Fed Downplays Chances of Aggressive Easing

June 26, 2019 - Written by Toni Johnson

After hitting its best levels in weeks yesterday, the British Pound to US Dollar (GBP/USD) exchange rate tumbled due to fresh comments from Federal Reserve officials. However, the US Dollar’s appeal was limited as the Fed remained dovish overall, and investors were hesitant to make any big moves on the US currency ahead of upcoming major US ecostats and Friday’s anticipated G20 Summit.

US Dollar weakness has been one of the most major causes of forex movement this month. Last week, GBP/USD saw solid strong gains from 1.2589 to close the week around the level of 1.2732.

At the beginning of this week, GBP/USD continued to trend with an upside bias and even briefly touched on a fortnight high of 1.2769 yesterday.

After that though, fresh comments from Federal Reserve officials led to a limited rebound in US Dollar demand. At the time of writing on Wednesday afternoon, GBP/USD trended closer to this week’s lowest levels of 1.2666.

GBP Exchange Rates Kept under Pressure as No-Deal Brexit Fears Persist

Investors have been hesitant to buy the Pound much in recent weeks, as the UK Conservative Party leadership contest appears likely to lead to a hard Brexit supporter succeeding Theresa May as Prime Minister.

Both remaining candidates, Boris Johnson and Jeremy Hunt, support a harder Brexit than outgoing PM Theresa May did.

The frontrunner Boris Johnson especially advocates a harder Brexit and has said that he would rather take Britain out of the EU with no deal than delay the Brexit process again.

With Johnson’s leadership seeming increasingly likely, no-deal Brexit fears have revived full force and the Pound’s appeal has weakened.

Analysts remain uncertain as to how the Brexit process will unfold and how Parliament will tackle the next Prime Minister’s Brexit plans. According to Derek Halpenny, European Head of Global Markets Research at MUFG Bank London:

‘We are heading for a showdown – a no-deal Brexit; a general election; or a second referendum,

The Pound is set to come under renewed downward pressure over the coming weeks with no deal still very much under-priced.’

USD Exchange Rates Rebound as Fed Officials Play Down Chances of Aggressive Easing

Following last week’s dovish shift in tone from the Federal Reserve, US interest rate cut bets surged. The bank signalled that rate cuts were likely over the next year.

This, combined with very dovish comments from some officials, as well as criticism of the bank’s high interest rates from US President Donald Trump, led some investors to predict that the bank’s easing plans could be quite aggressive.

Many investors began to bet that the bank could cut US interest rates by as much as 50 basis points during its July policy decision next month.

However, the US Dollar saw a sturdy rebound since Tuesday, as Fed Chairman Jerome Powell reiterated the bank’s independence from US politics.

This was perceived to mean that pressure from Trump would not sway the bank into taking an even more dovish stance.

St. Louis Fed President James Bullard also said that a 50 basis point rate cut in July would be overdoing it.

As a results, bets for a significantly more dovish Fed lightened, and the US Dollar advanced for most of today.

The US Dollar regained losses versus the Pound even though today’s US ecostats were highly disappointing.

US durable goods orders and wholesale inventories stats from May both fell short of expectations, with durable goods orders contracting at a deeper than expected -1.3%.

GBP/USD Exchange Rate Forecast: US Growth Report and Trade Tensions in Focus

The Pound outlook remains dominated by Brexit and political uncertainties, meaning the Pound to US Dollar exchange rate’s movement is more likely to be driven by US data than UK data towards the end of the week.

Federal Reserve speculation remains a big focus for US Dollar investors, so upcoming US data that could influence Fed interest rate cut bets could cause notable GBP/USD movement.

Perhaps the biggest dataset for GBP/USD investors this week will be published tomorrow, in the form of the final Q1 2019 Gross Domestic Product (GDP) growth rate report for the US.

US growth is expected to have improved to 3.1% quarter-on-quarter, but if it falls short of expectations the US economy may be perceived as even less resilient than expected and Fed interest rate cut bets would rise.

On Friday, UK growth rate and US PCE inflation stats will be published. However, with the G20 Summit in Osaka beginning on Friday as well, the Pound to US Dollar exchange rate’s movement is more likely to be driven by developments in trade and geopolitics.
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