Just hours after the Federal Open Market Committee (FOMC) delivered its latest policy statement, in which it intimated that interest rates are likely to rise in 2015, the US published growth data which could make those comments moot.
While the Fed took no policy action in its October gathering, as was expected to be the case, policymakers downplayed the risks attached to the current global economic outlook and asserted that they would be using domestic labour and inflation figures to guide their December rate decision.
In previous statements the FOMC had stated that weaknesses abroad could have an impact on domestic policy, so the removal of these comments was highlighted. The remarks were seen as sufficiently hawkish to inspire US Dollar gains and the North American currency advanced on rivals like the Pound and Euro.
Industry expert Stephen Stanley said of the statement; ‘Clearly, the committee made a decision to lean hard against the prevailing market view that liftoff would be postponed into 2016. My read of the October statement is that the Fed is putting everyone on high alert that a rate hike in December is the most likely scenario… I take the removal of the global risks sentence and the tweak to the liftoff sentence language as two very aggressive signals pointing toward a December rate hike unless the economic situation deteriorates.’
However, on Thursday the US released its annualised third quarter growth domestic product data and the GBP/USD exchange rate was able to push back above the 1.53 level before the close of trading.
The pace of US output was shown to have slowed markedly in the third quarter, with GDP easing from 3.9% in the second quarter to 1.5%. Economists had anticipated a growth rate of 1.6%.
What impact the slowdown in US output has on the US Dollar exchange rate largely depends on how the Federal Reserve reacts to the result.
Given how much the Fed has talked up a rate increase taking place before Christmas, it would come as a bit of a blow to investors if an incremental adjustment wasn’t made, but is the US economy robust enough to warrant higher borrowing costs?
If the central bank uses the data as an excuse to delay hiking interest rates until 2016, the US Dollar is liable to weaken in the interim – a positive for any UK businesses importing goods or services from the US.
That being said, a delay to higher US interest rates could also weigh on the Pound as most industry experts envisage the Bank of England (BoE) holding off from making any moves of its own until the Fed makes the leap.
While the slowdown was quite marked, analysts have highlighted the impact companies running down stockpiles of goods had on the rate of expansion. Given that this process is a temporary phenomena, with stocks needing to be replenished once they’ve reached a certain level, there’s every chance that growth could rebound in the fourth quarter.
The latest GDP stats also showed a fairly encouraging rate of consumer spending, with a 0.8% increase in the third quarter. Softer oil prices have been supportive of consumer spending and while the price of ‘black gold’ has fluctuated in recent weeks it remains 50% down on early 2014, meaning consumer spending is likely to continue feeling the benefit.
If the world’s largest economy does recover strength before the end of the year and upcoming US ecostats (like next week’s Non-Farm Payrolls report) support the case in favour of higher borrowing costs the US Dollar could have a bullish end to 2015.
If your business has dealings with the US and you’re concerned about the impact of potential GBP/USD exchange rate fluctuations on your profitability, you may want to consider looking into
risk-management options
, like fixing your exchange rate in advance of a trade or implementing a stop loss or limit order.