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Pound US Dollar (GBP/USD) Exchange Rate Rallies in Anticipation of Dovish Fed Commentary

May 13, 2020 - Written by Frank Davies

The first quarter UK gross domestic product proved slightly better than forecast, helping to limit the downside potential of the Pound Sterling to US Dollar (GBP/USD) exchange rate.

As the quarterly growth rate clocked in at -2.0% rather than the feared -2.5% this put limited pressure on Pound Sterling as investors had braced for a sharper deterioration.

Even so, the outlook for the UK economy remains muted in the wake of the weakest quarter of activity since the end of 2008.

James Smith, research director at the Resolution Foundation, cautioned:

‘The lockdown was only in place for seven working days in the first three months of the year. But it was still enough to bring about the biggest quarterly economic contraction since the peak of the financial crisis and the weakest single-month change on record.’

In spite of the government’s move to ease lockdown conditions in recent days the odds of a major second quarter contraction remain, something which could prevent any major Pound gains.

GBP/USD Exchange Rate Looks for Support on Signs of Federal Reserve Dovishness

With investors preparing for the latest commentary from Federal Reserve Chair Jerome Powell the mood towards the US Dollar soured, meanwhile.

In the wake of calls for the central bank to cut interest rates into negative territory markets are keen to gauge Powell’s current policy outlook.

If Powell adopts a more cautious tone on the subject of the US economic outlook and monetary policy this could see USD exchange rates shedding fresh ground on Wednesday afternoon.

Speculation over the possibility of further fiscal stimulus in the pipeline failed to shore up the US Dollar, with markets doubting the potential of another package being voted through.

On the other hand, if the Fed appears more resistant to the idea of negative interest rates this could offer the US Dollar some reassurance, putting a cap on the GBP/USD exchange rate uptrend.

Deepening US Production Slowdown Set to Dent US Dollar Demand

However, confidence in the underlying health of the US economy could take a fresh blow ahead of the weekend if April’s industrial and manufacturing production figures weaken as anticipated.

A major slowdown in production at the start of the second quarter would not bode well for the growth outlook, fuelling fears of a deeper recession.

Even so, the GBP/USD exchange rate could still come under pressure if May’s New York empire state manufacturing index shows an improvement on the month.

Any indication that the sector has started to recover some of its lost momentum could encourage the US Dollar to return to a stronger footing, in spite of any ongoing Fed policy speculation.
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