The Pound has been trending lower versus the US Dollar (GBP/USD) on Thursday and is presently trading in the region of 1.6335. Sterling has faced volatility this week as UK Prime Minister David Cameron has recalled parliament to determine the extent of the UK’s involvement in the escalating Iraq and Syria conflict. In Thursday’s European session the Pound has traded between 1.6342 at its highest point and 1.6274 at its lowest.
Sterling has derived some support however from Bank of England (BoE) Governor Mark Carney. During a speech in Wales the central bank chief made upbeat statements concerning interest rate hikes in the UK. Both the UK and US are in close contention to be the first economy within the Group of Seven developed nations to increase borrowing costs. While the US Federal Reserve has been relatively consistent in its stance regarding any adjustment to interest rates, the Bank of England’s Carney has gained the reputation of being an ‘unreliable boyfriend’ based on the conflicting nature of his comments.
However, after many months of yo-yoing between hawkish and dovish statements, today has seen a reassuring BoE stance for investors. Carney spoke in Wales today, stating: ‘The point at which interest rates… begin to normalise is getting closer. In recent months the judgement about precisely when to raise Bank Rate has become more balanced. While there is always uncertainty about the future, you can expect interest rates to begin to increase.’
UK interest rate hikes were first speculated to take place in November, a concept that has since become marginalised as many economists believe the first quarter of 2015 is more likely. However, both the BoE and the Federal Reserve have stressed the importance of appropriate timing when it comes to making adjustments to bank rate levels, suggesting any error could derail the whole economic recovery. Carney continued: ‘Headwinds facing the economy are likely to take some time to die down. Demand in our major export markets remains muted. Public balance sheet repair is ongoing. And a highly indebted private sector is likely to be particularly sensitive to changes in interest rates.’
As a result of Carney’s statement, the Pound rose to a two-year high versus the Euro (EUR). However, Sterling’s rise against the strong US Dollar may be slightly more tenuous. Currency strategist Jane Foley commented: ‘Carney’s definitely preparing the ground for the first interest rate hike. Buying the Pound against the Euro is a much safer proposition. There is so much Dollar bullishness out there it’s more likely to be an uneven ride for Cable [GBP/USD].’
Meanwhile, Federal Reserve Chairwoman Janet Yellen has told markets to prepare for the possibility of US rate hikes taking place sooner than forecast. This comes after Yellen’s consistent reassurance that interest rates will remain low for a ‘considerable time’. Economist Laura Rosner commented: ‘The risk is that the Fed ultimately does tighten policy in the way that it’s expecting and is communicating and markets have to adjust up very quickly in a disorderly way.’
Pound to US Dollar (GBP/USD) Exchange Rate Forecast
The Pound is likely to feel the effects of Carney’s statements for the rest of the week. Thursday saw UK Average Weekly Earnings figures increase by 3.3% in July on a year-on-year basis, higher than June’s 2.9%. Thursday saw US Durable Goods Orders slump lower than expected at -18.2% in August as demand for aircraft fell following July’s influx of purchases. Furthermore, Markit’s US Preliminary Purchasing Manager Services Index failed to meet expectations, with services slipping to 58.5 in September despite forecasts to reach 59.2.
Friday’s data may influence the GBP to USD exchange rate, with US Gross Domestic Product figures due for release along with the University of Michigan Confidence Index. Looking ahead to next week Sterling may enjoy support from Net Consumer Credit and Mortgage Approvals numbers on Monday. Meanwhile the US Dollar could experience some movement from Personal Income, Personal Spending and Pending Home Sales statistics. One of the most influential data releases next week for the US Dollar will come in the form of Change in Non-Farm Payrolls and Unemployment Rate figures on Friday. Investors in the ‘Greenback’ will be interested to see US unemployment numbers as it’s one of the factors that will dictate the timeline for US rate hikes. If next week’s data proves favourable for the UK economy, we forecast the Pound may be able to gain some stability versus the US Dollar. However, if the ‘Buck’ gains support from consistently upbeat US data, the US Dollar may trend higher against other currency majors.
US Dollar (USD) Exchange Rates
|US Dollar||Pound Sterling||0.6124|
|US Dollar||Canadian Dollar||1.1108|
|US Dollar||Australian Dollar||1.1380|
|US Dollar||New Zealand Dollar||1.2609|
|Canadian Dollar||US Dollar||0.9019|
|Pound Sterling||US Dollar||1.6296|
|Australian Dollar||US Dollar||0.8792|
|New Zealand Dollar||US Dollar||0.7918|