Pound to US Dollar Exchange Rate Forecast: Could Stronger US Inflation Encourage Greater Fed Hawkishness?

Update: Wall Street Rally Weighs Heavily on US Dollar Exchange Rates

As markets continued to react to Friday’s US jobs data, and shares on Wall Street pushed higher, the Pound to US Dollar (GBP/USD) exchange rate found further support.

With the US labour market still looking to have a significant degree of slack investors are betting that the Federal Reserve will not opt to raise interest rates quite so aggressively over the course of 2018.

In the absence of any particularly influential data this left the US Dollar on a generally weaker footing, with market risk appetite picking up somewhat.

Pound US Dollar Exchange Rate Gains on Weaker-than-Forecast US Wage Growth

The Pound to US Dollar (GBP/USD) exchange rate saw some strong gains ahead of the weekend on the back of February’s rather mixed raft of US labour market data.

Even though the headline non-farm payrolls figure strongly bettered forecasts, clocking in at 313,000 rather than 205,000, this was not enough to bolster demand for the US Dollar (USD).

Investors were instead preoccupied with the decidedly underwhelming average hourly earnings figures, which showed an uptick of just 0.1% on the month.

This weaker level of wage growth is likely to give Federal Reserve policymakers some cause for caution, diminishing the prospect of the central bank raising interest rates four times before the end of the year.

As a result, the appeal of the US Dollar was somewhat dented on Friday, especially as worries over the Trump administration’s approach to trade continued to fester.

Slowing UK GDP Erodes Pound Exchange Rate Upside Potential

Even so, the upside potential of the GBP/USD exchange rate was limited by a weaker-than-forecast NIESR gross domestic product estimate for the three months to February.

Markets were not particularly impressed to find that the think-tank sees a further slowdown in UK economic growth since the start of 2018, with analysts adopting a relatively cautious note.

All in all, with construction output found to have contracted sharply in January, the outlook for the domestic economy remains rather bleak.

If the first quarter GDP does show a fresh loss of momentum, as NIESR forecasts, this could diminish the prospect of the Bank of England (BoE) raising interest rates in the coming months.

Given the high level of uncertainty that still surrounds the post-Brexit future of the economy the Pound (GBP) is likely to see further weakness on the back of any signs of domestic weakness.

Strong US Inflation Forecast to Boost US Dollar on Fed Rate Hike Bets

A fresh rallying point could be in store for the US Dollar if February’s consumer price index data proves encouraging on Tuesday, to the detriment of the GBP/USD exchange rate.

Forecasts point towards a modest acceleration in inflationary pressure from 2.1% to 2.2% on the year, something which could increase the pressure on the Fed to act sooner rather than later.

As long as domestic inflation continues to show signs of building, the odds of an imminent Federal Reserve interest rate hike are likely to remain high.

On the other hand, any downside disappointment here could see the US Dollar trending lower once again as market confidence wavers.

While a March interest rate hike looks to be a near-certainty at this stage any weaker data could still discourage the Fed from pursuing a more aggressive pace of monetary tightening.

Pound Rally Possible on Upbeat UK Spring Statement

Meanwhile, in the absence of fresh UK data, the GBP/USD exchange rate could find support on the back of Chancellor of the Exchequer Philip Hammond’s Spring Statement.

With markets expecting to see a positive revision to the Office for Budget Responsibility’s economic and public finance forecasts the statement should give the Pound cause for confidence.

However, as these changes are unlikely to be accompanied by any policy alterations the ultimate impact of Hammond’s statement looks set to be more limited than not.

Brexit-based jitters look likely to continue hampering GBP exchange rates, meanwhile, as UK and EU officials still look decidedly at odds ahead of the next week’s round of negotiation talks.

Hannah Wilson

Contact Hannah Wilson