The interbank Pound to US Dollar exchange rate enters the New Year around the 1.22 mark.
‘Cable’ Slightly Lower than ‘Fair Value’
In 2016 many analysts estimated that 1.25 represented ‘fair value’ for the GBP/USD exchange rate, suggesting that there is room for Sterling to appreciate versus the ‘Greenback’ at the start of 2017.
However, the Federal Reserve’s hawkish outlook, which includes projections for a further three interest rate hikes this year, combined with President-elect Donald Trump’s plans for heavy fiscal stimulus, mean that hopes of a recovery in ‘Cable’ could be stymied.
Between Christmas and the New Year the only major ecostat related to GBP/USD showed that US consumer confidence soared to 113.7 in December – its highest level since 2001. The bullish figure represents the hope that Trump’s reflationary policies will lead to strong near term growth – even if analysts are concerned that debt-backed spending during a time of relative stability could lead to budget problems later down the line.
Strong UK Manufacturing Figures Fail To Lift Pound
UK manufacturing data released earlier this morning showed that the British factory sector witnessed its best month since June 2014 in December. The PMI rose from 53.6 to 56.1 but it was not enough to drive Sterling higher against the US Dollar. This muted reaction to a surprisingly robust UK data print can be taken as evidence of the uphill struggle Sterling faces versus the ‘Greenback’ in 2017.
Later this week we have UK construction and services data and perhaps the Pound could register some gains if Thursday’s services PMI also impresses. But Fed rate hike bets could easily put the US Dollar back into the driving seat on Friday if the latest US non-farm payroll report prints positively.