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Pound Sterling to US Dollar Exchange Rate Rebounds amid Fed Interest Rate Cut Bets

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Pound to US Dollar Exchange Rate Avoids Worst Levels despite Rising Brexit Fears

Both political and economic factors continue to weigh heavily on the Pound (GBP), but the Pound Sterling to US Dollar (GBP/USD) exchange rate has been able to hold above the multi-month-lows seen last week. This is due to a weakening US Dollar (USD).

The Pound has been among the weakest major currencies over the past month and GBP/USD has still endured significant losses. Last week marked its fourth consecutive week of losses, as GBP/USD tumbled from 1.2712 to 1.2631 throughout the week.

However, GBP/USD has been rebounding slightly since the end of last week, when it briefly touched on its worst level since the beginning of the year – 1.2563.

Rather than any UK news causing the rebound, a combination of profit-taking and Federal Reserve interest rate cut bets have led to fresh weakness in the US Dollar outlook.

Pound (GBP) Exchange Rate Rebound Limited by Concerning UK Manufacturing Outlook

The Pound was unable to capitalise on the US Dollar’s weakness this morning, as UK political and economic fears made investors hesitant to return to the British currency.

Concerns that a hard Brexit is becoming more likely due to the results of the EU elections and the likelihood of a hard Brexit supporter succeeding Prime Minister Theresa May have been the primary cause of Pound weakness recently.

On top of those factors though, this morning’s UK manufacturing PMI from Markit gave investors more reason to be anxious about Britain’s outlook.

Manufacturing was forecast to slow from 53.1 to 52, but instead unexpectedly fell into a contraction of 49.4.

What’s more, some analysts believe more weakness may be ahead for the manufacturing sector, as Brexit and trade war fears impact activity. According to Stephen Cooper from KPMG:

‘The global backdrop is also one of uncertainty – with trade wars, geopolitical events, automotive developments and Brexit – all of these factors are weighing on manufacturing in Europe and Asia and they are reflected in May’s readings.’

US Dollar (USD) Exchange Rates Weaken as Federal Reserve Interest Rate Cut Bets Rise

Due to rising concerns about how far the US government will take its recent trade protectionism, as well as fresh fears that trade tensions between the US and Mexico could dent the US economy, the US Dollar has been weaker in recent sessions.

Last Thursday, US President Donald Trump said that the US would put 5% tariff duties on all US imports of Mexican goods, and that they would gradually rise to 25% by October.

In response to the news, investors became more anxious that US trade protectionism was becoming more likely to have a negative impact on US economic activity.

According to Michael Feroli, Chief US Economist at JPMorgan Chase:

‘Even if a deal is quickly reached with Mexico, which seems plausible, the damage to business confidence could be lasting, with consequences that might still require a Fed response,’

The news had an impact on Federal Reserve interest rate cut bets, with some analysts predicting that the Fed could cut rates twice before the end of the year in order to stave potential economic damage from the trade protectionism.

This has been the primary reason for the US Dollar’s weakness since the end of last week.

Pound to US Dollar (GBP/USD) Exchange Rate Look to US Data as Fed Bets Remain in Focus

The US Dollar’s recent weakness has been due to rising speculation that the Federal Reserve will cut US interest rates in the coming year.

However, Fed officials have continued to indicate that the bank’s outlook will remain unchanged unless there is evidence of the US economy weakening.

As a result, US Dollar investors will be increasingly focused on US data for the US economic and Fed outlooks. Some key US data due in the coming days could prove influential as well if it surprises.

Tomorrow, US factory orders data will be published and Federal Reserve Chairman Jerome Powell will hold a speech.

Key US non-manufacturing PMI data from ISM will be published on Wednesday, with trade balance data on Thursday, and Non-Farm Payroll data due on Friday.

These key stats mean the US Dollar could drive GBP/USD movement this week.

Still, any surprising developments in Brexit and UK politics could also influence the Pound to US Dollar (GBP/USD) exchange rate and the pair’s outlook.