- Stronger US wholesale inventories failed to improve odds of Fed rate hike
- Pound trended higher ahead of BoE ‘Super Thursday’ releases
- Fed speakers prompt US Dollar movement
- Downgrade to BoE inflation forecast to dent GBP/USD exchange rate
Hawkish Fed Commentary Shored up US Dollar (USD) Demand
Comments from Kansas City Fed President Esther George helped to bolster the US Dollar (USD) ahead of the weekend, as the policymaker reiterated her hawkish view on monetary policy. Consequently the Pound Sterling to US Dollar (GBP/USD) exchange rate was slumped in the region of 1.4380 on Friday morning, as hopes of an imminent rate hike reignited.
GBP/USD Exchange Rate Dented as UK Industrial Sector Entered Recession
Central bank policy has remained a major influence on both the US Dollar (USD) and Pound Sterling (GBP) this week, as markets continue to weigh up the odds of any change in interest rates in the near future. While June had previously been vaunted as a strong possibility for another Federal Open Market Committee (FOMC) rate hike, the chances of such a move plunged to single digits following the disappointing nature of the most recent Non-Farm Payrolls report.
Although consequent NFIB Small Business Optimism and Wholesale Inventories figures showed signs of greater robustness within the world’s largest economy, this was not enough to fundamentally alter sentiment. As consolidation trading helped to shore up the ‘Greenback’, however, investors were also encouraged by the April Budget Statement, which revealed a $106.5 billion budget surplus. This suggested that the domestic economy might not be experiencing as severe a slowdown as some had posited, prompting the Pound Sterling to US Dollar (GBP/USD) exchange rate to cede ground.
Confidence in the Pound (GBP), meanwhile, was generally diminished on Wednesday by an unimpressive set of Industrial and Manufacturing Production figures. The industrial sector slipped into recession for the third time since 2008, boding ill for the prospects of the wider UK economy and GDP results. With manufacturing output also in freefall, Sterling slumped sharply across the board, prompted lower still by a discouraging NIESR GDP Estimate.
BoE Rate Decision & Inflation Report Predicted to Weigh on Pound Sterling (GBP)
Demand for Pound Sterling nevertheless picked up on Thursday morning ahead of the Bank of England’s (BoE) May policy meeting. There were no expectations for policymakers to change interest rates at this juncture, although there had been some suggestions that one, or even two, votes in favour of a rate cut could emerge in light of recent data. While ‘Brexit’ uncertainty continued to weigh on sentiment and the domestic economy, however, it seemed unlikely that there would be any substantial shift in the outlook of the Monetary Policy Committee (MPC).
Also of interest to markets will be the BoE’s quarterly Inflation Report, which could see the central bank’s previous forecasts revised lower. Expectations of weaker inflationary pressure are likely to see bets pushed back for the timing of the first BoE interest rate hike, underlining increasing worries over the outlook of the UK economy. Nevertheless, as Elwin de Groot, Senior Eurozone Strategist at Rabobank, commented:
‘The likelihood of changes to the inflation outlook are less straightforward. While slower growth implies weaker demand, this year’s softer tone of sterling could boost cost-push inflation, i.e. not the demand-pull inflation the Bank is aiming for. Moreover, over the past month there have been mixed signals on the pace of wage growth and without a recovery in earnings we expect the first BoE rate hike of the cycle to be delayed at least until May 2017.’
GBP/USD Exchange Rate Forecast: Fed Rate Speculation May Prompt ‘Greenback’ Rally
Commentary from a number of Fed speakers will be in focus later on Thursday, as researchers at TDS noted:
‘It will be a very busy day for Fed speakers with Mester, Rosengren and George all on the agenda; all of them are voters in 2016 with George registering the lone dissenting vote for a hike at the last two meetings.’
Should a greater sense of hawkishness be on display from any of the three policymakers, the US Dollar (USD) could well recover some of its strength. While talk of a June rate hike is largely exhausted the prospect of an imminent move in July or September could offer sufficient encouragement to investors.
Marked improvements in either the April Advance Retail Sales or May University of Michigan Confidence Index reports could offer further support for the ‘Greenback’ ahead of the weekend. Any indication of weaker domestic sentiment, however, is likely to give the GBP/USD exchange rate another boost.
Reaction to the BoE’s commentary will remain the primary influence of the Pound, meanwhile, although a substantial decline in UK Construction Output may add further downside pressure to the softened currency.
Current GBP, USD Exchange Rates
At the time of writing, the Pound Sterling to US Dollar (GBP/USD) exchange rate was trending higher in the region of 1.4449, while the US Dollar to Pound Sterling (USD/GBP) pairing was slumped around 0.6921.
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