- Pound Sterling Exchange Rates Decline – IMF blames Brexit for cut to global growth expectations
- US Dollar Exchange Rates Surge – Safe-haven demand and positive data supports USD gains
- Federal Reserve Rate Hike Prospects Improve – However USD overvaluation and weak global growth may prevent tighter policy in the near-term.
- GBP USD Exchange Rate Forecast to Hold Losses – Brexit uncertainty continues to undermine confidence in GBP
The combination of damp market sentiment and positive domestic data caused the US Dollar to rally during Tuesday’s European session. Meanwhile, the British Pound struggled against nearly all of its major peers despite registering positive domestic data results. The depreciation is mostly due to continued anxieties regarding the Brexit fallout, but also in response to traders taking profits following yesterday’s robust Sterling gains.
GBP USD Exchange Rate Below 1.32 despite Better-than-Expected UK Inflation
In contrast to yesterday’s European session, GBP exchange rates struggled today. The depreciation was initiated overnight as traders took advantage of Sterling’s gains by taking profits.
Even positive domestic data wasn’t enough to offset GBP exchange rate losses. Of particular interest was June’s Consumer Prices data which bettered the market consensus on the year. The core inflation measure also trumped expectations.
Chris Williamson, chief economist at Markit, said: ‘UK inflation rose in June, buoyed by rising airfares and higher oil prices. Inflation had been stuck at 0.3% for most of the year to date prior to June, but the latest increase was one of the largest seen since late-2014, and likely to be the start of a rising trend in prices as costs march higher in response to the recent slump in Sterling.’
Many analysts believe that the positive inflation data had a muted impact because it refers to a pre-Brexit Britain.
Also weighing heavily on demand for the Pound was a damning report from the International Monetary Fund. The report cut 2017 global growth expectations from 2.2% to 1.3% and blames weaker expectations on Brexit.
‘The Brexit vote implies a substantial increase in economic, political, and institutional uncertainty, which is projected to have negative macroeconomic consequences,’ stated the IMF report. ‘But with the event still unfolding, it is very difficult to quantify its potential repercussions.’
USD GBP Exchange Rate Holds above 0.76 on Safe-Haven Demand
The US Dollar advanced versus nearly all of its major peers during Tuesday’s European session. The appreciation was mostly the result of demand for safe-haven assets as low crude oil prices and crashing European stocks weighed on risk-appetite.
Also fuelling USD gains is renewed optimism regarding the potential for a near-term Federal Reserve rate hike. Market odds improved after a string of positive domestic data results indicated that the US economy can handle tighter policy.
Today’s US data showed that Housing Starts advanced by 4.8%; well above the median market forecast 0.2%.
‘With mortgage rates so low, that provided an additional boost to the market, but at the same time we’re close to reaching cruise speed so I don’t think we’re expecting stellar performance going forward.’
However, US Dollar overvaluation remains a major concern and could delay a cash rate increase irrespective of economic growth. This is because tighter Fed policy would coincide with US Dollar gains. If the US asset becomes too high-valued, US export growth will be significantly damaged.
GBP USD Exchange Rate Forecast: First Post-Brexit UK PMIs in Focus
Although there will be several British ecostats due for publication over the coming week, few will be very impactful. This is because most of the reports pertain to a pre-Brexit Britain. However, Friday will see the first publication of post-Brexit sectoral PMIs. Traders will want to pay particular attention to the Services PMI as the services sector accounts for the largest portion of UK GDP.
In terms of US data, high-importance publications will be thin-on-the-ground. Friday’s preliminary result for July’s Manufacturing PMI will be the most likely report to cause US Dollar volatility this week.
The GBP USD exchange rate was trending within the range of 1.3104 to 1.3272 during Tuesday’s European session.