Pound to US Dollar Exchange Rate Investors Highly Anticipate US Inflation Data
Since markets opened this week, the US Dollar (USD) has seen stronger demand which has caused the Pound to US Dollar (GBP/USD) exchange rate to tumble.
On Thursday morning, the US Dollar remained firm as investors awaited Friday’s US Consumer Price Index (CPI) report, and GBP/USD trended near a fortnight low of 1.3476.
Despite a lack of particularly impressive US ecostats in recent sessions, the US Dollar has rebounded from the multi-month lows seen last week thanks in part to anticipation for the upcoming inflation report, which could have a strong influence on the US Dollar outlook.
US inflation is forecast to have slipped in December, from 0.4% to 0.2% month-on-month and from 2.2% to 2.1% year-on-year.
As the Federal Reserve has expressed uncertainty about the US inflation outlook in recent months, a disappointing inflation report could weigh heavily on the US Dollar and cause the currency to resume its recent weak-streak.
Pound (GBP) Exchange Rates Limp Following Mixed UK Datasets
Investors haven’t been left any more optimistic about Britain’s economic outlook this week, as recent UK data has failed to impress and UK Prime Minister Theresa May’s domestic position continues to be perceived as weak.
While Wednesday’s UK manufacturing and industrial production results beat expectations, they failed to notably improve the Pound (GBP) outlook.
These datasets indicated that Britain’s factory sector boosted UK growth more than expected towards the end of 2017. However, as the sector makes up only a small portion of Britain’s growth and uncertainty remains about Brexit’s potential effect on factory activity, Sterling remained weak.
Pound trade was also largely unaffected by NIESR’s estimate for Q4 UK growth. The Gross Domestic Product (GDP) prediction came in at 0.6%, higher than the analyst consensus prediction of 0.5%.
Instead, investors remained anxious about Britain’s economy and the Pound was left unappealing, due largely to political uncertainties surrounding Brexit and November’s UK trade deficit update.
The trade deficit deepened to £-2.804b month-on-month while the previous figure was revised lower to £-2.270b.
This worsened concerns that the Pound’s drop in value was not helping to keep the deficit lighter and investors are concerned this figure could become even worse when the Brexit process ends.
Pound to US Dollar (GBP/USD) Exchange Rate Forecast to be Driven by Inflation Stats
Major US and UK Consumer Price Index (CPI) will be published over the coming sessions and these have the potential to cause a notable shift in Pound to US Dollar (GBP/USD) exchange rate movement.
Friday’s US inflation report will of course have an influence on the Federal Reserve’s 2018 outlook for monetary policy, especially if it surprises.
If inflation meets expectations however, the US Dollar outlook may not see much change in trajectory and the bank is likely to continue to vaguely hint at three interest rate hikes being possible this year.
Next Tuesday will see the publication of Britain’s own December inflation report, which could influence Bank of England (BoE) speculation and Pound exchange rates if it surprises.
UK inflation is forecast to have slipped slightly from 0.3% to 0.2% month-on-month and from 3.1% to 3% year-on-year.
If UK inflation comes in higher than expected, it could boost speculation that the BoE will be pressured to hike UK interest rates again in 2018. This would lead to stronger Pound demand.
A lower than forecast UK inflation figure however, could leave the Pound outlook subdued and could make it easier for the US Dollar to continue its recent recovery against the British currency.