Prospect of Fed Rate Hike Failed to Weigh on GBP USD Exchange Rate
Following a stronger-than-expected jump in the University of Michigan Confidence Index the Pound US Dollar (GBP USD) exchange rate has recovered some ground. Although signs continue to point towards robustness within the world’s largest economy, demand for the ‘Greenback’ has eased ahead of the final Federal Reserve policy meeting of the year. Investors are generally confident that policymakers will opt to raise interest rates imminently, a prospect that had been largely priced into USD exchange rates in previous weeks.
Support for Sterling has remained generally limited in the absence of fresh domestic data, meanwhile, with markets still concerned by the uncertainty surrounding the UK economy outside of the EU. While a campaign group has called on the government to offer a guarantee to non-British EU nationals living in the UK that they will have the right to remain permanently, this has done little to assuage fears of an impending hard Brexit. As a result it seems unlikely that the GBP USD exchange rate will hold onto its current modest uptrend for long.
GBP USD Exchange Rate Forecast: Rising UK Inflation Expected to Dent Pound Demand
November’s UK Consumer Price Index report is not likely to offer particular encouragement to the Pound, with forecasts pointing towards a renewed uptick in domestic inflation. Inflation is expected to have risen from 0.9% to 1.1% on the year, as the sharp rise in producer prices since the referendum result filters through into the wider economy. However, given that the Bank of England (BoE) has indicated that it is willing to look through some increase in inflation this could see the Pound soften.
If Fed policymakers prove more hawkish in tone at the Federal Open Market Committee (FOMC) meeting the GBP USD exchange rate could come under renewed pressure, meanwhile. As researchers at BBH noted:
‘The Dollar may continue to be well supported ahead of the meeting where a rate hike is fully discounted. The Fed officials may revise up growth and inflation forecasts, and still not take into account the extent of fiscal stimulus that may be delivered. The President-elect’s team has indicated the initial economic focus will be on trade, not taxes or stimulus. Nevertheless, investors anticipate both fiscal stimulus and a more hawkish configuration at the Federal Reserve.’
If the Fed fails to deliver on the expectations of the markets, however, the US Dollar could experience a renewed slump. So long as indications point to the pace of monetary tightening remaining slow in the coming year then the GBP USD exchange rate may find some fresh support.
Current Interbank Exchange Rates
At the time of writing, the Pound US Dollar (GBP USD) exchange rate was trending higher in the region of 1.25, while the US Dollar Pound (USD GBP) pairing was slumped around 0.79.
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