The looming spectre of Brexit and hints that the US Federal Reserve may leave the economy to heat up are likely to affect GBP USD long term exchange rate forecasts.
Brexit Negotiation Jitters to Dominate Pound Exchange Rate Forecasts as Article 50 Trigger Approaches
The Pound has become increasingly decoupled from economic data in recent weeks, causing many traders to reclassify it. HSBC have suggested it is now politically correlated, while others have observed that it is moving like an emerging market currency.
GBP could become firmly entrenched in this pattern in the long-term as markets contemplate the UK’s Brexit negotiation tactics. Rhetoric from the Prime Minister in recent days has indicated the government intends to pursue a ‘Hard Brexit’, although the Financial Times reports that the government is considering paying into the single market in order to protect key sectors of the UK economy.
Continued speculation ahead of the triggering of Article 50 next year is likely to keep risks to GBP USD long term exchange rate forecasts firmly tilted to the downside.
USD Exchange Rate Long-Term Forecast; Will Fed Let Economy Run Hot?
Federal Reserve Chair Janet Yellen spoke recently of the ‘plausible ways’ in which the US economy might benefit in the event that it was left to run hot. This means the Federal Reserve would not act to curb inflation or unemployment as quickly as normal, potentially letting price growth exceed the target range and employment rise above what is considered sustainable.
According to Yellen;
‘If strong economic conditions can partially reverse supply-side damage after it has occurred, then policymakers may want to aim at being more accommodative during recoveries than would be called for under the traditional view that supply is largely independent of demand. [It would] make it even more important for policymakers to act quickly and aggressively in response to a recession, because doing so would help to reduce the depth and persistence of the downturn.’
This has not altered the market bets for monetary policy in December, with the futures market still pricing in odds of around 70% that interest rates will be higher. This is because, even with a raise to 0.75%, US interest rates would remain incredibly accommodative compared to their pre-recession levels of 5.25%. Longer-term, Yellen’s plan could weaken expectations of further tightening – and therefore US Dollar exchange rates. The futures market currently expects the first adjustment after December will not be until September 2017, although there is still an 18% chance rates will be at their current levels by then.
Interbank GBP USD Exchange Rates
At the time of writing the Pound US Dollar (GBP USD) exchange rate was trending in the region of 1.21, while the US Dollar Pound (USD GBP) exchange rate was trading around 0.82.
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