Stronger UK Mortgage Approvals Encourage Pound US Dollar (GBP/USD) Exchange Rate Recovery
A solid uptick in UK mortgage approvals encouraged the Pound Sterling to US Dollar (GBP/USD) exchange rate to push higher once again at the start of the week.
As approvals rose to their highest level since August 2015 confidence in the underlying health of the UK economy improved, shoring up Pound Sterling (GBP) on Monday morning.
This improvement suggests that sentiment among both lenders and households strengthened in the wake of the December general election, in spite of other recent signs of weakness.
While a stronger housing market may not be enough to give the Bank of England (BoE) any renewed cause for confidence this still offered GBP exchange rates a leg up.
Howard Archer, chief economic adviser to EY Item Club, noted:
‘December’s jump in mortgage approvals adds to a growing amount of firmer data and survey evidence suggesting that the housing market could well be changing up a gear after a lacklustre 2019.’
GBP/USD Exchange Rate Vulnerable to BoE Dovishness
However, the Pound could struggle to hold onto a positive footing over the course of the week as anticipation for the BoE policy decision mounts.
After the dovish comments made by policymakers earlier in the month markets still see high odds of an imminent interest rate cut.
If the BoE ultimately chooses not to cut interest rates at this stage the appeal of the Pound could improve sharply on Thursday.
Even if the central bank leaves monetary policy on hold, though, any fresh dovish signals from policymakers may still weigh on the GBP/USD exchange rate.
As long as markets see reason to expect an interest rate cut in the months ahead the upside potential of GBP exchange rates is likely to prove limited.
On the other hand, if the BoE follows through with the anticipated rate cut this could see the Pound falter against its rivals once again.
Steady Fed Policy May Encourage Fresh US Dollar Gains
Volatility could also be in store for the US Dollar (USD) thanks to the Federal Open Market Committee’s (FOMC) latest policy announcement.
With no change in monetary policy expected from the Fed on Wednesday this could limit the downside potential of USD exchange rates.
If the Fed signals a willingness to leave policy on hold for longer, in spite of increasing political pressure, the mood towards the US Dollar could see a sharp improvement.
Signs of greater caution among policymakers, however, may leave USD exchange rates on the back foot once again.
Even so, a stronger showing from January’s Richmond Fed manufacturing index may encourage a greater sense of optimism.
Evidence that the world’s largest economy recovered some of its lost momentum in the face of ongoing global trade jitters could see the GBP/USD exchange rate weaken.
An increasing sense of market risk aversion may also benefit the US Dollar in the days ahead amid worries over the spread of the coronavirus.