The outlook for the Pound US Dollar (GBP USD) exchange rate remains predominantly in the ‘Greenback’s’ favour, with markets deeming the Federal Reserve to be the more likely candidate for a cycle of rate hikes, and the resumption of Brexit negotiations this Thursday liable to cause volatility for the Pound.
Brexit Negotiations Resume Thursday – GBP USD Exchange Rate Volatility Likely
UK Prime Minister Theresa May spoke at the CBI conference in London on Monday morning, discussing her outlook and intentions regarding the ongoing state of Brexit negotiations.
The Prime Minister told various leading business chiefs that were present that they should regard the future of Britain’s economy with rational optimism and that Brexit itself might result in various ‘huge opportunities’ for businesses in the years ahead.
Beyond this, May tried to tackle the elephant in the room that is the prospect of a ‘cliff-edge’ Brexit and what it could mean for businesses. She stated:
‘As we look ahead to the next ten years for Britain’s economy, we should do so as rational optimist. I have made clear that a strictly time-limited implementation period will be crucial to our future success. I know how important it is for business and industry not to face a cliff-edge and to have the time they need to plan and prepare for the new arrangements’.
May also asserted that Britain’s economy can thrive ‘with the right economic foundations, a balanced approach to public spending and the best Brexit deal’.
This outlook was ultimately deemed reassuring and positive by the markets, with investor demand for the Pound quickly rising as a result.
Whether this will continue on Thursday when negotiations resume, however, is another question – as markets will most likely want to see firm evidence of progress by Friday before they are willing to buy further into the currency.
USD Outlook Positive on Fed Rate Hike Prospects
The outlook for the US Dollar remains positive, with ongoing hype for US President Donald Trump’s tax reform continuing to provide upward momentum in conjunction with the almost certain prospect of a rate hike in December from the Federal Reserve.
Whilst the Federal Reserve held off on a rate hike last week, they left the door open for one in December by maintaining a positive outlook on the state of the US economy.
The accompanying statement read:
‘The labour market has continued to strengthen and … economic activity has been rising at a solid rate despite hurricane-related disruptions’.
In keeping with the positive outlook, Fed policymakers also acknowledged that whilst inflation remains limp, it is not reason enough to downgrade their assessment for pricing expectations.
Many have asserted that this essentially confirmed a December move, with the decision to pick Fed Governor Jerome Powell to eventually replace Janet Yellen as Chairman of the Federal Reserve sealing the deal, as it were, in that the Bank will most likely continue its current course of gradual normalisation.
The Fed has raised rates twice so far this year, with a third having been forecast for a long time, and, barring some severely below-forecast data prints between now and then, the possibility that a rate hike will occur remains high.
Near-Term BoE Rate Hike Prospects Diminish – GBP Outlook Subdued
Despite raising interest rates at the November rate meeting, the Bank of England (BoE) is seen as the comparatively less hawkish option moving into 2018.
This is primarily due to the dropping of a line from the BoE’s statement that originally suggested that the bank’s pace of rate hikes would soon increase, as well as the risks of ongoing Brexit related uncertainty.
The statement read thusly:
‘Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly’.
Combined, the November policy meeting has left investors concerned, with future rate hikes liable to be very slow in occurring.
Because of this, the outlook for GBP USD remains somewhat limited. On one hand, any positive progressions made regarding Brexit could buoy Sterling against the currently strong ‘Greenback’, but on the other, the Fed is likely to move for a rate hike in December and Trump’s tax reform is also expected before the end of the year; two events that could topple the currently vulnerable Pound.
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