After a year of big moves, the Pound to US Dollar exchange rate is set to end 2016 around 26 cents weaker than it began.
Although British economic data remained sturdy in the first half of the year, demand for Sterling was curtailed by fears that Britain could be plunged into uncertainty if June’s EU referendum led to Brexit. This caused GBP/USD to drift from 1.48 to 1.40 by the end of the first quarter.
‘Cable’ Tanks On Brexit
Having hit a yearly high north of 1.50 on the eve of the referendum results, the Pound tanked 16 cents against the ‘Greenback’ in the days immediately following the historic Brexit vote.
GBP/USD tumbled to 1.29 during August when the Bank of England slashed interest rates to record lows and restarted its large-scale asset purchasing programme with a mind to loosen policy further in the future.
Flash Crash Takes GBP/USD To 31-Year Low
With so little buyers for the Pound, a cascade of large Sterling sell orders sent GBP/USD plummeting to a 31-year low of 1.14 on October 7. The flash crash marked the low point for the Pound and ‘Cable’ settled at around 1.22 after that.
Sterling then had a little renaissance. With GBP/USD already having fallen so far, the Bank of England decided that no further stimulus was necessary. Prices started to rise in stores and inflation expectations went through the roof, causing some analysts to tentatively start pricing in the possibility of higher BoE rates in 2017.
The ‘Trump Bump’
While Donald Trump’s shock election victory sent the US Dollar to a 14-year high versus a basket of its most-traded currency peers, the unconventional leader’s reflationary policies actually allowed Sterling to rally versus the ‘Greenback’. The ‘Trump Bump’ helped drag GBP/USD back towards 1.28 at the start of December as investors bet that close economic and political ties between the UK and the US would help change the fortunes of the embattled Pound.
The Federal Reserve, however, put an end to the appreciation in ‘Cable’ by raising interest rates 25 basis points to 0.75%. The Fed tightening, combined with updated plans to hike a further three times in 2017 energised the US Dollar and drove GBP/USD back down to 1.22.
2017 Sterling to US Dollar Prospects
Having declined 26 cents in 2016, it is possible that we could see GBP/USD trade with a little less volatility in 2017.
If UK Prime Minister Theresa May decides to campaign to remain inside the EU single market then the impact of Brexit will be softened and demand for the Pound should remain buoyant. However, if PM May opts to pursue a ‘hard Brexit’ after invoking Article 50 in March then we could easily see GBP/USD trade lower as business uncertainty kicks in once more.
The US Dollar looks set to gain if the Fed sticks to its timetable of three hikes in 2017, however, we must remember that the US central bank planned to raise rates four times in 2016 and only managed one piece of tightening. If we see a repeat of this overestimation then it could actually damage the US Dollar and give Sterling the impetus to strengthen.
Analysts anticipate a GBP/USD rate of 1.20-1.25 for most of the year.