Pound to US Dollar Exchange Rate Continues to Gain on Federal Reserve Outlook
Following last week’s solid jump, the Pound Sterling to US Dollar (GBP/USD) exchange rate has continued to climb this week so far. Investors have sold the US Dollar (USD) en masse as it becomes clearer that the Federal Reserve is shifting the aims of its monetary policy.
After opening last week at the level of 1.3089, GBP/USD spent most of the week seeing fairly sharp gains. GBP/USD ultimately saw impressive gains of over two cents, closing the week at 1.3351.
This week has already seen further gains from GBP/USD. At the time of writing on Tuesday morning, GBP/USD is trending near highs of 1.3437 – the best level for the pair all year.
Bets for US monetary policy to remain ultra-loose for longer were among the primary reasons for the US Dollar’s continued weakness. This is helping the Pound (GBP) to gain, even as hard Brexit fears rise.
Pound (GBP) Exchange Rate Advances Dampened by Underwhelming UK Manufacturing Data
The Pound has been climbing against a weaker US Dollar since last week. However, Brexit jitters and mixed UK data have been limiting these gains, which are being driven more by broad US Dollar weakness.
Today saw the publication of Britain’s final August manufacturing PMI from Markit. The data was expected to show manufacturing improving, but the final figure was a slightly smaller improvement than forecast.
The figure came in at 55.2 rather than the expected 55.3.
Not only was the data slightly weaker than expected, the report also showed that factories were beginning to make more job cuts over the past month. According to Rob Dobson, Director at IHS Markit:
‘The downturn in employment may have further to run as the government’s furlough scheme is phased out unless demand rises sharply.
Given the fragility of demand and uncertain outlook, both in terms of COVID-19 and Brexit, policymakers may struggle to prevent a ‘surge-then-slump’ scenario from developing.’
US Dollar (USD) Exchange Rates Hit Significant Lows amid Reaction to Federal Reserve Dovishness
Last week saw major comments from Federal Reserve officials during the Central Bank Symposium at Jackson Hole. Markets were spooked by indications that the Fed would continue to focus on protecting US employment rather than tackling inflation.
It left markets betting that the Fed would leave monetary policy ultra-loose for a long time to come. The US Dollar plunged across the board in reaction to the news.
As markets realign expectations for US monetary policy, the US Dollar becomes less and less appealing. August was the fourth consecutive month of losses for the currency.
Analysts say that the US Dollar’s weakness is also the primary cause of GBP/USD gains. Lee Hardman, Analyst at MUFG, said ‘It’s still a weaker Dollar that is lifting Cable (GBP/USD),’
Pound to US Dollar (GBP/USD) Exchange Rate Awaits PMIs and US Non-Farm Payrolls
The coming days could be vital for the Pound to US Dollar (GBP/USD) exchange rate. Many key UK and US ecostats will be published through the end of the week.
Following today’s slightly weaker UK manufacturing report, services and composite stats will follow on Thursday. If these also fall below forecasts, the Pound could see fresh pressure.
On the other hand, Sterling may see a more solid rise in demand if the key services PMI beats forecasts.
As for the US Dollar, it is likely to remain pressured as markets readjust bets on the Federal Reserve outlook. The US Dollar will remain sensitive to shifts in global market sentiment and some analysts believe there is further weakness ahead for the currency.
According to Michael Gayed, Portfolio Manager at Toroso Investments/ATAC Rotation Fund:
‘There’s a lot of speculation these days that the Dollar will crash and lose its prominence as the global reserve currency,’
In terms of this week’s data, the biggest news on the horizon for USD investors will be Friday’s key Non-Farm Payroll report for August.
The Pound to US Dollar (GBP/USD) exchange rate’s potential for further gains into 2020 highs could highly depend on how broad the US Dollar’s ongoing weakness is.