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GBP to USD Exchange Rate Rebounds from 2-Year-Worst as Federal Reserve Rate Cut Bets Dominate Outlook

July 12, 2019 - Written by David Woodsmith

While it initially seemed as though the British Pound to US Dollar (GBP/USD) exchange rate was on track for a second consecutive week of losses this week, the US Dollar saw yet another onset of weakness towards the end of the week. This helped the pair to recover, as US Dollar investors await further major US ecostats due next week to influence Federal Reserve speculation and the US Dollar’s strength.

After opening last week at the level of 1.2528, GBP/USD slipped lower and even touched on a 2-year-low of 1.2445 near the middle of the week as the US Dollar rebounded on hopes for a less dovish Federal Reserve.

However, following more dovish comments from the Fed in the middle of the week, GBP/USD saw a solid recovery. GBP/USD trended with an upside bias near the week’s opening levels on Friday.

GBP Exchange Rates May Rebound Further despite No-Deal Brexit Fears

The past week was another mixed one for the Pound, as UK data continued to indicate that Britain’s economy was being negatively impacted by Brexit uncertainties, and political news continued to be dominated by the persistent threat of a no-deal Brexit.

The candidates to be Britain’s next Prime Minister still indicate that a worst-case scenario no-deal Brexit is a plausible outcome, moreso than a delay to the process.

However, despite no-deal Brexit feats still overshadowing the outlooks for Britain and the Pound, the British currency did find a little fresh support towards the end of the week.

On Thursday, the Bank of England (BoE) published its latest financial stability report, and said that it believed Britain’s banking system and financial sector would survive a possible no-deal Brexit or a global trade war.

While Bank of England Governor Mark Carney reasserted that these events would still be highly destabilising and damaging to Britain’s economy, confidence that Britain’s banks would survive a no-deal Brexit did offer the some Pound some fresh support.

On top of this, some analysts speculate that the Pound’s recovery may only just be beginning. Strategists from UBS, for example, think the Pound is oversold:

‘Current levels make Sterling the second-cheapest G10 currency after the Yen from a valuation perspective. We think this weakness is overdone and Sterling is due for a rebound,’

USD Exchange Rates Remain Weak amid Rising Federal Reserve Interest Rate Cut Bets

Earlier in the week, investors were buying the US Dollar amid speculation that bets of aggressive easing from the Federal Reserve had been overdone.

Markets speculated that the Fed could be much less dovish than feared due to some stronger than expected US Non-Farm Payroll data earlier in the month.

However, Federal Reserve Chairman Jerome Powell took a more dovish than expected tone on US monetary policy during speeches this week, and the latest Fed meeting minutes also showed that most policymakers were preparing for eased monetary policy.

Due to Powell’s more dovish tone, markets perceived a July interest rate cut from the Fed to be essentially confirmed.

Speculation has also returned that the bank could even cut rates by 50 basis points, or that there could be as many as three interest rate cuts over the next year.

With the Fed expected to be among the more dovish major Central Banks over the next year, the US Dollar has been tumbling.

GBP/USD Exchange Rate Forecast: More Weak US Data Could Push US Dollar Lower Still

While next week’s US data won’t be quite as influential, there are still some notable stats which could cause notable shifts in Federal Reserve interest rate cut bets if they surprise investors.

With Britain’s Conservative Party leadership contest entering its final full week, political news and no-deal Brexit fears could return to focus.

Contest frontrunner Boris Johnson is widely expected to win and become Britain’s next Prime Minister before the end of the month, so any surprising developments on him or his Brexit stances are likely to influence the Pound.

UK political news will likely be the focus for Pound traders, ahead of upcoming UK ecostats like job market, inflation, and retail sales stats.

As a result, unless there are many notable developments in UK politics, US data that could influence Federal Reserve bets like US retail sales or production figures are most likely to influence the Pound to US Dollar exchange rate next week.
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