March’s highly anticipated Federal Reserve policy meeting is under a week away and excitement for a possible US interest rate hike has kept the Pound to US Dollar exchange rate low.
GBP USD has plunged from just below 1.23 to 1.21 this week alone as March Fed rate hike bets have firmed at over 85%. More and more investors are pricing in a rate hike next week as reality.
However, as March rate hike bets have surged so far in the last few weeks, any disappointing key US data could cause them to suddenly plunge.
This is why global markets will be heavily focused on Friday’s February US Non-Farm Payroll results and next Wednesday’s February Consumer Price Index (CPI) report.
If they come in close to or above expectations, traders will lock in on bets that the Fed will hike US interest rates next week which will leave the GBP USD exchange rate vulnerable to further falls.
Even if next week’s UK news impresses, it may not regain much value unless the US data disappoints. If US data disappoints or the Fed chooses to leave US interest rates frozen in March, the US Dollar will plummet and GBP USD will put in a solid recovery regardless of UK data.
Next week’s Fed meeting won’t just influence the direction of short-term GBP USD movement, but mid to long-term movement too.
A rate hike next week means the Fed is hiking rates at a faster pace than many analysts previously expected. This could lead to GBP USD being considerably lower in the coming months, especially if the Fed follows up with more rate hikes.
The Brexit process is also set to begin in March and will be unfolding throughout the year, which will add regular downside risks and uncertainty to the already weak Pound’s movement. Some even speculate the Brexit process could begin as soon as next week which would add further downside risks to GBP investment.
Next week’s UK economic calendar is likely to influence short-term Pound movement, but is unlikely to significantly alter the long-term Pound to US Dollar exchange rate unless the Bank of England (BoE) marks a shift in tone in its upcoming policy meeting.
In recent months, the BoE has taken to being cautiously optimistic while indicating that high Brexit uncertainty means that UK monetary policy is equally likely to be either loosened or tightened.
If next week’s BoE meeting is simply a repeat of that tone, with UK monetary policy being left frozen and uncertainty warnings dominating the meeting minutes, the Pound will not see any long-term shift in direction.
However, a notable deviation from this tone – either hawkish or dovish – would change the Pound outlook dramatically.
Sterling may also be influenced by an optimistic UK Gross Domestic Product (GDP) outlook from the BoE, which could relieve concerns that Britain’s slowing retail and services sectors could slow 2017 growth.
As it stands, the single biggest influence to the long-term Pound US Dollar exchange rate will be next week’s Federal Reserve meeting. A rate hike will shift the long-term GBP USD outlook lower, while a freeze will shift the outlook higher.
At the time of writing, the Pound to US Dollar exchange rate trended in the region of 1.21. The US Dollar Pound exchange rate trended in the region of 0.82.
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