USD GBP Exchange Rate Rallies Ahead of FOMC Meeting Minutes
US Dollar (USD) exchange rates took a beating over the holiday period amid concerns about what impact below-target inflation could have on 2018’s monetary policy outlook.
Beyond this, markets were somewhat flummoxed by the US Dollar being so unresponsive to the successful passing of sweeping US tax reform, with investors seemingly split between the idea that positive effects will likely not be seen for some time, and the possibility that the massive addition to the US deficit could limit the US economy in the long run.
Nonetheless, the US Dollar rallied on Wednesday, bolstered by the relative weakness of the Euro (EUR) and some robust manufacturing figures as markets await the imminent release of the FOMC’s December meeting minutes.
But what can we expect from these minutes? And what effect could it have on the USD GBP exchange rate?
Volatility Likely for the USD GBP Exchange Rate on FOMC Meeting Minutes
The US Federal Reserve raised short-term interest rates for the third time in 2017 at the December meeting, with the accompanying statement putting the Fed on track for a similar path in 2018.
Markets have now upped their predictions to a possible 4 rate hikes in 2018, with the odds of a 25 basis point rise in March sitting at 75%.
Despite these odds, various top Fed officials continue to be mystified about why inflation remains below the target of 2%, with Chairman Janet Yellen labelling it a ‘mystery’ (though she does expect it to stabilise over time).
If the minutes reveal even more concern about soft levels of inflation then the USD GBP exchange rate could come under increased pressure, especially if it knocks the odds of a hawkish move in March.
Conversely, optimistic commentary could support USD exchange rates.
US Domestic Data Smashes Expectations, USD GBP Exchange Rate Climbs
Business confidence within the US manufacturing sector grew in December, according to data from the Institute of Supply Management.
The US ISM manufacturing purchasing managers index (PMI) climbed to 59.7, smashing November’s score of 58.2 and the market forecast of 58.1.
This marked the highest reading in three months, with solid growth in production as well as new orders ultimately boding well for the state of the US economy moving into 2018.
James Knightley, Chief International Economist at ING asserted that this report provides even more evidence that the US economy could grow 3% this year.
James stated:
‘Another huge ISM reading shows the manufacturing sector is in great shape and will make a major positive contribution to economic growth this year’.
This successfully bolstered the USD GBP exchange rate, with the relative weakness of the Euro also boosting the pairing.
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