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US Dollar Pound (USD/GBP) Exchange Rate Rises as Bank of England Rate Cut Fears Weaken Sterling

USD/GBP Exchange Rate Edges Higher, BoE Rate Cut Fears Hold Back Pound

The US Dollar to Pound (USD/GBP) exchange rate rose by 0.6% today, with the pairing currently trading around £0.770 as UK markets priced in a 50% chance of an interest rate cut from the Bank of England (BoE), following weaker-than-expected growth in the UK economy in November.

Peter Dixon, an Economist at Commerzbank, comments:

‘With a growing chorus on the [BoE’s Monetary Policy Committee] apparently open to the prospect of a rate cut, if the data points in that direction, today’s release might well tip the balance of one or two members ahead of the meeting on 30 January, where the market probability assigned to a 25 bps cut has risen to 50% versus 5% at the start of last week.’

This comes after Gertjan Vlieghe, a member of the BoE’s Monetary Policy Meeting, said he would back an interest rate cut if the UK’s economic barometers failed to reveal a bounce in the UK’s economy following December’s general election win for Prime Minister Boris Johnson.

Mr Vlieghe commented:

‘It doesn’t take much data to swing it one way or the other and the next few [MPC] meetings are absolutely live …I really need to see an imminent and significant improvement in the UK data to justify waiting a little bit longer.’

Brexit is also remaining a concern for Pound traders, with fears now rising that the UK and the EU could fail to secure a full trade deal due to Boris Johnson’s insistence of a shortened timeframe for the UK-EU transition period, which is due to terminate in late December this year.

USD/GBP Exchange Rate Rises, ‘Greenback’ Traders Hopeful on US-China Trade Deal

The US Dollar (USD) rose against the weaker Sterling today on renewed hopes of a US-China trade deal, which is due to be signed off this week. As a result, this has encouraged ‘Greenback’ traders as the US economy could benefit from a de-escalation in relations with the second-largest economy.

Andreas Steno Larsen, a Strategist at Nordea Markets, was cautious in his analysis, however:

‘The Phase one signing ceremony will likely be the highlight of next week (Wednesday). It would be a massive shocker if the deal is not signed next week as even the Chinese side sounds positive. The new Chinese Fin-Twit Darling, Hu Xijin, has essentially promised the world that the deal will be signed and even went as far as praising Trump’s Iran press conference. The actual substance of the Phase one deal is highly debatable.’

However, following last week’s payrolls figure December, which climbed to 145,000 and undercut expectations of a 164,000 increase – alongside weakening wage growth to its lowest levels since July 2018 – US Dollar investors are becoming increasingly concerned for the health of America’s domestic economy.

USD/GBP Outlook: Could Sterling Sink on Increasing BoE Rate Cut Odds?

Pound (GBP) traders will be looking ahead to Wednesday’s release of December’s UK inflation figure, which is forecast to rise by 1.5%, well below the Bank of England’s target. As a result, we could see the Pound continue to weaken as a rate cut becomes more likely.

USD traders, meanwhile, will be looking ahead to tomorrow’s publication of the US inflation figure for December, with any signs of improvement providing another boost for the USD/GBP exchange rate.

We could see the Pound face further volatility this week as investors focus on economic data. Any signs that the UK economy continues to flag would further improve the odds of a BoE rate cut and prove GBP-negative.