Pound to US Dollar Exchange Rate Sheds a Third of Last Week’s Gains
Despite seeing strong gains last week, the Pound Sterling to US Dollar (GBP/USD) exchange rate has already shed a good chunk of that as the Pound (GBP) was knocked by an unexpected contraction in UK growth yesterday.
Last week saw GBP/USD climb from 1.2633 to 1.2737 throughout the week, gaining around a cent in response to broad US Dollar (USD) weakness.
Since a brief climb to a fresh half-month-high when markets opened yesterday though, GBP/USD has tumbled, briefly touching a low of 1.2658 before trending closer to the level of 1.2690 today.
The Pound saw one of its daily drops in a month in reaction to a slew of disappointing UK ecostats. The US Dollar was able to easily capitalise on this, as the currency saw a rebound in demand due to optimism towards US trade tensions.
Pound (GBP) Exchange Rates Stuck Lower as Brexit Hits Economic and Political Uncertainty
Investors are unlikely to have much reason to buy the Pound in the coming sessions, as a lack of clarity over how Brexit will unfold continues to cause uncertainty in multiple aspects of Britain’s outlook.
The Conservative Party’s leadership contest officially began yesterday, and so far it appears that the clear frontrunner is ex-London Mayor and prominent Brexiteer Boris Johnson.
The contest will last for the remainder of this month and much of July. Uncertainty amid the contest and how it may influence Brexit going forward is keeping a lid on the Pound’s appeal.
Yesterday’s UK growth rate data was the cause of the latest Sterling tumble. The data revealed that Britain’s economy unexpectedly contracted -0.4% month-on-month in April, rather than just the expected -0.1%.
Analysts responded to the news by speculating that Britain’s economy could contract in Q2 2019, as Brexit uncertainty hit business and economic activity. These political and economic factors are leaving the Pound outlook weak.
US Dollar (USD) Exchange Rates Rebound Limited amid Federal Reserve Rate Cut Bets
When markets opened yesterday, the US Dollar rebounded on signs that the US and Mexico were likely to avoid worsening trade tensions.
The US and Mexico agreed to a deal that would prevent trade tariffs late last week, but US President Donald Trump continued to indicate that tariffs were still possible if Mexico did not hold up its end of the agreement.
Hopes for smooth relations in North America led to a US Dollar rebound yesterday, but the currency’s potential for gains was limited as Federal Reserve interest rate cut bets continued to rise.
Due to a combination of US trade tensions and weakness in recent US inflation and jobs data, bets have surged that the Federal Reserve will cut US interest rates at some point over the next year.
This was the primary cause of GBP/USD gains last week, and has limited GBP/USD losses this week so far as well as keeping pressure on the US Dollar outlook.
Pound to US Dollar (GBP/USD) Exchange Rate May Fall Further if US Data Impresses
While there isn’t much potential for the Pound to advance due to UK political and economic fears, the Pound to US Dollar (GBP/USD) exchange rate could continue to fall despite the US Dollar’s own recent weakness.
Some analysts, such as Manuel Oliveri from Credit Agricole London, argue that the Fed interest rate cut bets may be over-priced:
‘Bets of US rate cuts have been rising quickly in recent days and we think the pricing has become too aggressive so the Dollar’s downside is limited,’
If Fed rate cut bets lighten a little it could lead to a bit more of a rebound in the US Dollar. Still, with Fed interest rate cut bets still high, the US Dollar’s potential rebound is likely to be limited either way.
As a result, investors are also highly anticipating the major US inflation data due tomorrow afternoon.
US Consumer Price Index (CPI) data from May will be published during the American session and the yearly rate is expected to show that inflation weakened.
If inflation beats expectations, it could lighten Fed interest rate cut bets and the Pound to US Dollar (GBP/USD) exchange rate outlook could worsen further.