- Dovish Fed commentary weakened US Dollar demand – Chances of imminent rate hike retreated further
- Brexit uncertainty began to weigh on Pound ahead of referendum vote – Appeal of the Pound muted by market jitters
- IMF downgraded US growth forecast – GBP/USD exchange rate trended higher in response
- Pound volatility expected on final EU referendum result – GBP slump anticipated if Brexit camp prevails
Despite persistent uncertainty over the outcome of the UK’s EU referendum, the Pound to US Dollar (GBP/USD) exchange rate remained on a strong footing, benefitting from the bearishness of the ‘Greenback’.
Lower Odds of Brexit Boosted Pound (GBP) Exchange Rate
While domestic data has been decidedly lacking from the UK this week that didn’t prevent the Pound (GBP) from making some strong gains against its rivals. Even though opinion polls remain close, support for the ‘Remain’ campaign showed signs of regaining momentum over the weekend, prompting markets to take an increasingly optimistic view of the referendum outcome. As a result, with the odds of a Brexit lowered, the Pound Sterling to US Dollar (GBP/USD) exchange rate rallied to 1.4832, the pairing’s best level since January.
Confidence in the US Dollar was generally muted, meanwhile, in response to commentary from Fed Chair Janet Yellen. Taking a step back from the more hawkish rhetoric seen ahead of May’s disappointing Non-Farm Payrolls report, Yellen once more indicated that the Fed will act in accordance with the latest economic data and take a gradual pace with monetary tightening. As this rather undermined the odds of the Fed opting to raise interest rates before the end of the year the ‘Greenback’ softened in response, lacking in any strong safe-haven demand to shore it up.
US Dollar (USD) Trended Lower after Downward Revision of IMF Growth Forecast
Worries over the outlook of the US economy increased further on Thursday after the International Monetary Fund (IMF) cut its 2016 growth forecast for the country. As the fund lowered its GDP prediction from 2.4% to 2.2% optimism in the world’s largest economy naturally weakened. Commenting on the report Michael Every, Head of Financial Markets Research at Rabobank, noted:
‘The IMF warned that the US risks a future of low growth due an ageing population (though participation rates among the elderly are rising, not falling if one looks); stalling productivity and lack of investment (not helped by corporate borrowing being ploughed into share buybacks rather than capital stock or training workers); and rising inequality and poverty, now including one in seven people and one in five children: those in poverty don’t tend to spend much.’
As a result of this the GBP/USD exchange rate was able to make strong gains on Thursday morning, despite the looming spectre of the final referendum result. Although the general appeal of the Pound took on a more muted tone as the UK polls opened this was not enough to outweigh the faltering demand for the ‘Greenback’.
A more decisive shift in sentiment surrounding the Pound is likely to come later this evening, however, as Kit Juckes, Research Analyst at Societe Generale, noted:
‘Two polls are expected to be released on Thursday evening after the polls close, with YouGov’s poll of a pre-selected group of people thought to be ‘representative’ of the electorate set to be announced on Sky News.’
GBP/USD Exchange Rate Forecast: Pound Predicted to Slump if UK Votes for a Brexit
This afternoon’s raft of US data could do something to bolster the US Dollar, with any stronger signs of economic activity likely to tip the balance in the favour of the ‘Greenback’. While the latest Manufacturing PMI is forecast to have edged higher in June, this could be overshadowed by a disappointing Leading Indicators reading for May. The indicator of economic growth is expected to have slowed from 0.6% to 0.2%, a result which would not bode overly well for the outlook of the US economy or the chances of the Fed raising interest rates in the near future.
However, movement on the GBP/USD exchange rate is likely to remain predominantly tied to developments in the UK referendum. If exit polls point towards greater support for the ‘Leave’ campaign then confidence in the Pound is likely to weaken significantly overnight, with markets likely to move decidedly away from the British asset in response to a vote for a Brexit. On the other hand, if the ultimate result is a victory for the ‘Remain’ camp then the GBP/USD currency pair is likely to make further gains ahead of the weekend.
Current GBP, USD Exchange Rates
At the time of writing, the Pound Sterling to US Dollar (GBP/USD) exchange rate was making strong gains around 1.4861, while the US Dollar to Pound Sterling (USD/GBP) pairing was slumped in the region of 0.6729.
Comments are closed.