Pound US Dollar Exchange Rate Could Rise Further from Lows
The Pound US Dollar exchange rate soared on Tuesday afternoon, reaching above 1.23 at various points as Sterling soared across the board on the latest surprising Brexit development.
Markets grew more hopeful on a good UK EU deal in a post-Brexit Britain, after it was indicated by Downing Street officials that a vote on any Brexit agreement in 2019 or beyond would ‘very likely’ need the ratification of an MP vote in order to be passed.
The US Dollar trended sturdily thanks to news that September’s Consumer Price Index (CPI) had improved to 1.5% year-on-year as expected. However, as Sterling surged the ‘Greenback’ struggled to hold it back.
(Published 10:28 BST 18/10/2016)
The Pound to US Dollar exchange rate was able to make a solid advance during Monday’s American session as yet another high ranking Fed official called the possibility of a December interest rate hike into question. After beginning the week in the region of 1.21, GBP USD was trending above 1.22 on Tuesday morning.
Pound (GBP) Demand Little-Affected by Spike in UK Inflation
There has been speculation from analysts in recent weeks that the Pound is increasingly becoming a currency that is not affected by economic data as much as it is by political (particularly Brexit-related) news.
However, Tuesday’s Consumer Price Index (CPI) score was more to do with its perceived lack of effect on Britain’s economic improvement.
As GBP has plummeted in value since the Brexit vote, it’s only natural that consumer prices would eventually feel this and spike. CPI jumped from 0.6% to 1.0% year-on-year in September, beating the expected hop to 0.8%.
The Bank of England (BoE) expected this jump in prices and as such has repeatedly reminded markets that it would not alter monetary policy based upon inflation overshooting targets.
US Dollar (USD) Slumps as Fed Vice Chair States Low Rates are Damaging but Necessary
The US Dollar has performed poorly this week compared to last week, thanks largely to lower bets that the Federal Reserve could hike interest rates in December.
After Fed Chairwoman Janet Yellen took a dovish tone on Friday, stating that a high-pressure economy of eased monetary policy could continue to spark activity, Fed Vice Chair Stanley Fischer took a different view on Monday.
Fischer stated that there were numerous factors to ultra-low interest rates which were out of the Fed’s control, even though policymakers were aware of the dangers of loose policy. He indicated that the economy could remain this way for some time, weighing heavily on December Fed rate hike bets. This allowed the Pound to easily advance against the US Dollar in Monday’s American session.
Pound US Dollar Exchange Rate Forecast: Fed’s Hotly Speculated December Decision to Dominate USD Movement
After the US news released over the last week or so, traders are frantically adjusting their Fed rate hike bets, which were as high as 70% last week and have slipped lower on policymaker comments since last Friday.
US markets have been heavily pricing in an expected Fed rate hike all throughout 2016. Four were initially expected by the Fed’s own admission, then two. Markets now take one interest rate hike in December almost for granted.
If the Fed lets down markets in December by leaving rates frozen – making it over a year since December 2015’s small rate hike – the US Dollar is likely to plunge in value.
As we’ve seen so far this week, Sterling is still able to advance if its rivals are weak; as such lower Fed rate hike bets have seen GBP USD advance. As a result, Sterling could avoid its worst forecast 2016 levels against the ‘Greenback’ if the Fed opts to avoid a December rate hike.
At the time of writing, the Pound US Dollar exchange rate traded at around 1.22, while the US Dollar Pound exchange rate trended in the region of 0.8165.
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