The Pound US Dollar exchange rate has recovered slightly from its worst levels in over a week due to rising market uncertainty about the Federal Reserve monetary policy outlook. However, as this week’s UK data has disappointed, investors are hesitant to buy into the Pound either. GBP USD dropped from 1.3028 to a low of 1.2900 this week. It has since recovered to around 1.2935.
Pound (GBP) Gains Limited by Poor Trio of PMIs
While the Pound has recovered slightly against the US Dollar, the outlook for the British currency remains pretty grim. This week’s ecostats have indicated that Britain’s economy could be in for a slowdown during the summer months.
Markit’s June manufacturing and construction PMIs both showed a drop in business confidence, as businesses hesitated to make new investments amid Britain’s recent political uncertainties. The Brexit process and the instability it could bring for businesses has had an impact on confidence too.
The services PMI also fell short of expectations. Analysts projected services to slow from 53.8 to 53.5 but it slowed slightly further than expected to 53.4.
This indicated that the household pay squeeze, caused by rising inflation and slowing wage growth, has had a direct effect on Britain’s biggest private sector.
In the mid to long-term, analysts continue to warn that the pay squeeze could worsen Britain’s growth outlook in the second half of the year.
As markets are concerned about the resilience of Britain’s economy in the face of the pay squeeze, Bank of England (BoE) tightening bets have dropped and the Pound outlook is lower.
Friday’s UK trade balance results are unlikely to have a notable impact on the long-term Pound outlook, but speeches from Bank of England (BoE) officials over the next week could give Sterling some support if they continue to indicate tightening is possible in the foreseeable future.
US Dollar (USD) Weaker as Fed Sends Mixed Messages
Wednesday saw the publication of the Federal Open Market Committee’s (FOMC) latest meeting minutes, and investors aren’t entirely optimistic about the details of the report.
While the Fed did hike rates during its June meeting and did vaguely indicate it intended to hike rates a third time before the end of the year, some Fed policymakers have expressed concern.
Recent US inflation data has slowed further than expected, which caused investors to worry that the Fed would hold off on further interest rate hikes. Some Fed policymakers even expressed concerns about inflation within the minutes report.
However, most policymakers viewed the drop in inflation as temporary, indicating inflation would be closely observed before the Fed makes further moves.
The Fed also showed divisions on when would be best to start withdrawing its stimulus measures, such as the Fed’s big balance sheet, in order to continue normalising monetary policy.
More than anything, these factors have made markets hugely uncertain about the timing of the Federal Reserve’s next actions.
Investors are likely to increase bets of further 2017 action from the Fed if upcoming inflation data and wage growth data is strong. Until then, the US Dollar’s strength is limited and markets speculate the Fed may not see further action until next year.
GBP USD Interbank Rate
The Pound US Dollar exchange rate was trending in the region of 1.2935 at the time of writing. The US Dollar to Pound exchange rate was trading at around 0.7732.
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