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US Dollar’s Long-Term Gains Against Pound Depend on Pace of Fed Rate Hikes

US Dollar Currency Forecast

The US Dollar to Pound exchange rate strengthened last week, but its gains softened towards the end of the week despite weakness in the Pound as the pair neared significant psychological resistance above the level of 0.82.

This is largely because the Federal Reserve is so widely expected to hike US interest rates in its policy meeting on the 15th that any new data supporting a March rate hike is unsurprising to traders.

With a March Fed interest rate hike essentially already priced into the US Dollar, investors will be looking ahead to evidence supporting even further interest rate hikes in the coming months before they drive the ‘Greenback’ higher.

Traders are also anticipating news from US President Donald Trump on his proposed tax reform and fiscal policy plans.

Trump has been largely quiet on the plans thus far despite them being a big campaign promise, which has frustrated investors.

If Trump’s plans emerge soon, this could give the US Dollar a fresh boost and could allow it to break through resistance levels against the Pound.

Failing that, the US Dollar will begin to benefit in the coming weeks from any data indicating that the Fed could continue its recent pace of interest rate hikes.

The Fed intimated in its December meeting that it could hike US interest rates two or three times throughout 2017 and investors are expecting the first of these to take place this week.

If mid to long-term economic indicators remain solid, bets for Fed rate hikes in May onwards will increase and the US Dollar could advance.

The strength of the Pound and the outlook during the early weeks and months of the Brexit process will also play a key part in USD GBP movement.

Recently analysts have been speculating on just how soon Article 50 will be activated and the Brexit process will begin proper. The tone of the early UK-EU Brexit negotiations could drastically alter long-term Brexit forecasts and influence the Pound.

Concerns about Britain’s Gross Domestic Product (GDP) outlook in 2017 and 2018 will also be a focus of GBP traders for the foreseeable future.

Following strong economic activity in the second half of 2016, investors had become optimistic that Britain’s economy would continue to see solid activity and growth despite the Brexit process.

However, recent data has indicated that UK wage growth is not keeping up with spikes in consumer prices which could cause consumer spending to slump later in the year and have a negative effect on Britain’s key services sector.

Many analysts predict USD GBP has further to climb in the long-term due to the hawkish US interest rate outlook and gloomier UK growth prospects.

 

At the time of writing, the US Dollar to Pound exchange rate trended in the region of 0.8184. The Pound to US Dollar exchange rate traded at around 1.2218.