Despite some decent UK wage data yesterday, the Pound Dollar exchange rate continues to trend near its weekly lows due to Brexit jitters and high Federal Reserve interest rate hike bets.
The Sterling outlook worsened further when disappointing UK retail data was published, knocking GBP USD nearer its weekly lows of 1.3138, over a cent below the week’s opening level of 1.3285.
Pound (GBP) Unappealing on Brexit Jitters and Retail Sales Contraction
The Pound outlook has taken a bit of a beating since markets opened this week, as despite some hopes about progress in Brexit negotiations, fears of a possible ‘hard Brexit’ have returned.
Britain’s government is struggling to break through a ‘deadlock’ in UK-EU Brexit negotiations. The deadlock emerged due to a lack of clarity from the UK government on its financial obligations to the EU, as well as clashes within the UK government.
While reports have emerged that the EU will attempt to soften its tone in order to avoid weakening UK Prime Minister Theresa May’s position at home, May continues to see pressure from hardliners.
Some ‘hard Brexit’ supporting Conservative MPs are calling on May to simply drop and walk away from Brexit negotiations, which would mean Britain leaving the EU without any new trade deals.
Markets and businesses are highly anxious about this possibility, which has limited the Pound’s strength in recent days.
The Pound outlook worsened further on Thursday as markets digested the publication of Britain’s September retail sales report.
UK retail sales were forecast to come in at 2.1% year-on-year and contract at -0.1% month-on-month. However, the figures instead dropped to 1.2% and -0.8% respectively.
The previous figures were also revised lower. Overall the report indicated that UK retail activity was much worse than expected and worsened concerns that Britain’s economy was slowing as wages failed to keep up with the rate of inflation.
As a result of recent data, Bank of England (BoE) interest rate hike bets slipped.
The Sterling outlook could improve slightly if UK Gross Domestic Product (GDP) data due next week beats expectations, or if the BoE continues to indicate that it is likely to hike UK interest rates soon regardless of the poor retail data.
Otherwise though, the British currency’s gains could be pretty limited in the mid to long-term.
US Dollar (USD) Holds Ground as Fed Rate Hike Bets Remain Strong
Since Monday, investors have become increasingly confident that the Federal Reserve is preparing to hike US interest rates once more this year – likely in December.
Fed Chairwoman Janet Yellen took a relatively hawkish tone in her speech over the weekend. Since then US data has largely been strong enough to support the idea of a rate hike too.
The most notable US ecostats were September’s industrial production and import prices results, which were published on Tuesday.
Industrial production rose to 1.6% year-on-year and import prices came in higher than expected in both monthly and yearly prints.
While Wednesday’s US building permits and housing starts results disappointed, this was perceived as being largely due to the destruction caused by hurricanes in the south of the US in recent months.
As a result, market bets of a December Fed interest rate hike are still over 90%.
The US Dollar is unlikely to weaken much in the coming days, as investors remain optimistic about the chances of a US interest rate hike in December.
A Saturday speech from Fed Chairwoman Yellen, as well as next week’s PMI data and Gross Domestic Product (GDP) projections have the potential to influence the ‘Greenback’ too.
If Yellen continues to indicate a Fed rate hike is likely and US data is solid, the GBP USD exchange rate outlook will remain low.
GBP USD Interbank Rate
At the time of writing this article, the Pound Dollar exchange rate trended in the region of 1.3160. The US Dollar to Pound exchange rate traded at around 0.7600.
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