- Sterling trended higher on UK sales data – Consumer confidence appeared unaffected by ‘Brexit’ uncertainty
- Hawkish Fed minutes boosted chances of imminent rate hike – US Dollar bullish as markets repriced odds of imminent action
- BoE dovishness pushed GBP/USD exchange rate lower – Policymaker suggested possibility of interest rate cut irrespective of referendum outcome
- US manufacturing data forecast to provoke volatility – Stronger showing could boost likelihood of June rate hike from Fed
Pound (GBP) Made Strong Gains Following Bullish UK Retail Sales
Following an IPSOS MORI poll that suggested the ‘Remain’ campaign had pulled significantly ahead of ‘Leave’, the Pound (GBP) entered a bullish run. Sterling’s gains were extended further on Thursday by the latest UK Retail Sales figures, which bettered expectations to show growth of 4.3% rather than 2.5% on the year. This stronger showing eased fears that referendum uncertainty had been weighing significantly on consumer confidence, driving the Pound higher across the board. Researchers at ANZ consequently noted:
‘It shows the consumer is quite active ahead of Brexit and the revision to the March data suggest that some of the gloom over economic activity slowing sharply ahead of Brexit has been unwarranted. If this better tone is maintained, the data would tend to counter the need for another interest rate cut, especially as oil and commodity prices have firmed.’
On the other hand, the US Dollar (USD) was prompted to trend sharply higher in the wake of the latest Federal Open Market Committee (FOMC) meeting minutes. Policymakers proved decidedly more hawkish than markets had anticipated, triggering a rapid scramble for investors to re-price the odds of a June interest rate hike. However, the Pound Sterling to US Dollar (GBP/USD) exchange rate remained on an uptrend in spite of this, due to persistent doubts that the Fed could actually act so soon. This was noted by researchers at Goldman Sachs, who commented:
‘While we still do not expect the next hike to come as early as June, the minutes meaningfully raised the odds and reaffirmed that monetary policy remains on a normalization path.’
US Dollar (USD) Softened as Odds of June Fed Hike Diminished by Disappointing Manufacturing Data
Confidence in the ‘Greenback’ was dented by the Philadelphia Fed Index, which rapidly undermined the likelihood of an imminent rate hike. The manufacturing survey failed to improve as forecast, instead weakening from -1.6 to -1.8 in May. This discouraging result raised fresh concerns over the outlook of the domestic manufacturing sector, seeming to indicate that subsequent measures of activity could prove equally disappointing. As a result the odds of a June rate hike dipped, pulling down the US Dollar as slowdown concerns continued to hamper the domestic economy.
As Fed policymakers Stanley Fischer and William Dudley also failed to offer strong support for the idea of an imminent interest rate move on Thursday afternoon the GBP/USD exchange rate remained on a stronger footing.
However, the Pound was unable to maintain its upwards momentum ahead of the weekend, as profit taking drove the currency back from its recent highs. Sentiment was also dented by dovish comments from Bank of England (BoE) policymaker Jan Vlieghe, who suggested that interest rates could be lowered even if the UK votes to remain in the EU. Vlieghe noted that underlying weakness in the domestic economy could force the need for further monetary stimulus, as referendum uncertainty has potentially masked a general faltering in economic growth.
GBP/USD Exchange Rate Forecast: US Manufacturing PMI and UK Borrowing Figures in Focus
At the start of the new week, the US Manufacturing PMI is likely to be of particular interest to investors after the weaker Philadelphia Fed survey, with any stronger signs of sector growth expected to offer support to the US Dollar. Nevertheless, even if the PMI does allay slowdown concerns, the ‘Greenback’ is likely to remain vulnerable to any downside data surprises as a June Fed move remains highly conditional on positive data.
The UK’s public finance figures for April may prompt the Pound to trend lower against rivals, if the borrowing deficit is found to be wider than forecast. Although Chancellor of the Exchequer George Osborne has already missed his borrowing target for the 2015-2016 fiscal year a narrower level of public sector borrowing could bolster confidence in the domestic economy. A higher figure would also do little to discourage further ‘Brexit’-based volatility in the currency.
Later in the week the first quarter GDP results for the UK and US are expected to cause more pronounced volatility for the GBP/USD exchange rate, particularly if slowdown pressure remains in evidence.
Current GBP, USD Exchange Rates
At the time of writing, the Pound Sterling to US Dollar (GBP/USD) exchange rate was slumped around 1.4559, while the US Dollar to Pound Sterling (USD/GBP) pairing was making gains in the region of 0.6868.
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