The Pound US Dollar exchange rate surged to its best levels since the UK general election on Wednesday afternoon, as Sterling traders were surprised by a surprising shift in tone from Bank of England (BoE) Governor Mark Carney.
Carney mentioned in a speech at the European Central Bank’s (ECB) Forum in Portugal that the BoE may need to unwind its aggressive stimulus program in if Britain’s economic outlook firms in the coming months.
After months of caution and dovishness from Carney, this was seen as a notable hawkish shift. However, analysts were careful to point out that Carney’s stance relies on UK wage growth and Brexit outlooks improving.
[Published 11:31 BST 28/06/2017]
The Pound US Dollar exchange rate has advanced this week despite a lack of upside factors in Pound trade. Uncertainty about the US economic outlook under President Donald Trump as well as a vague tone from Fed Chairwoman Janet Yellen has caused traders to sell the US Dollar.
This week has seen GBP USD climb from 1.2715 to around 1.2830 – its best level in over two weeks.
Pound (GBP) Outlook Uncertain on Bank of England Split
The British Pound has seen mixed trade so far this week due to a lack of influential domestic ecostats, as well as a perceived disagreement on monetary policy within the Bank of England (BoE).
Wednesday saw another BoE policymaker throw his hat into the debate on whether or not Britain was ready for tighter monetary policy.
BoE Deputy Governor Jon Cunliffe argued that there wasn’t enough pressure in Britain’s economy to justify hiking UK rates. He also believed that higher borrowing costs would simply worsen the household wage squeeze situation.
He backed the line set by BoE Governor Mark Carney last week, while BoE chief economist Andy Haldane has argued a rate hike may be necessary by the end of the year.
Even with the hawkish Kristin Forbes stepping down from the Monetary Policy Committee (MPC) at the end of June, a split between BoE members on what policy best handles Britain’s tough economic situation remains evident.
As well as potentially Haldane, Ian McCafferty and Michael Saunders are likely to vote for a rate hike again in August’s BoE policy decision.
However, analysts expect rates will ultimately remain on hold as other policymakers Ben Broadbent and Gertjan Vlieghe are likely to remain dovish.
Even if Kristin Forbes’ successor, Silvana Tenreyro, unexpectedly takes a hawkish stance, a potential 4-4 vote split in August or beyond would still end in rates being left frozen due to BoE Governor Carney’s firmly dovish stance.
As a result, with even the Bank of England outlook uncertain, the Pound outlook lacks direction.
US Dollar (USD) Slips on Lack of US Economic Confidence
USD sentiment has dropped once again this week as uncertainties about the US economic outlook become more apparent to investors.
Tuesday saw the International Monetary Fund (IMF) cut its US growth forecasts. The 2017 growth forecast was cut from 2.3% to 2.1% while the 2018 projection was chopped to 2.1% too, from 2.5%.
The IMF noted that US President Donald Trump’s economic policy proposals were no longer seen as likely to succeed.
Doubts about Trump’s ability to push through his ambitious tax and infrastructure proposals have worsened due to ongoing Trump-Russia controversy as well as the Republican Party’s difficulty passing a new healthcare bill through Congress. Investors are increasingly doubtful that Trump will find enough Congress support for his economic policies
The US Dollar outlook has also been pressured in recent weeks by lower bets of a third 2017 interest rate hike from the Federal Reserve.
The Fed repeatedly indicated in the first half of the year that it intended to hike US interest rates three times throughout 2017.
While 2017 is only around halfway over, weaker US ecostats, especially slowing inflation, have weighed heavily on Fed rate hike bets.
Fed Chairwoman Janet Yellen failed to offer Fed bets or the US Dollar much support in her speech this week. Investors perceived that she was hesitant to talk monetary policy, which led to further weakness in the US Dollar.
If Fed interest rate hike bets aren’t improved by US data or comments from officials in the coming weeks, the long-term US Dollar outlook will worsen and GBP USD could continue to rise.
GBP USD Interbank Rate
At the time of writing this article, the Pound US Dollar exchange rate trended in the region of 1.2815. The US Dollar to Pound exchange rate traded at around 0.7805.
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