The Pound to US Dollar exchange rate has softened by around three cents over the last week due to concerns that the British economy is slowing and political uncertainty is rising.
Federal Reserve Chairwoman Janet Yellen Strikes Hawkish Tone
The GBP/USD exchange rate began last week’s session on the back foot due to bets that the Federal Reserve would raise interest rates again in 2017. Fed Chair Janet Yellen signalled that, despite soft inflation, ‘gradual’ rate rises were likely in the foreseeable future.
The Fed’s latest ‘dot plot’ projection graph suggests that a December rate hike is on the cards and Yellen’s upbeat message appeared to corroborate this outlook, thus boosting the appeal of the ‘Greenback’.
The US Dollar pushed ahead further later in the week when US annualised GDP for the second quarter was revised up from 3.0% to 3.1%.
GBP/USD continued to soften on Friday when UK annualised growth was downgraded from 1.7% to 1.5% due to an unexpected slowdown in the dominant service sector.
Political Concerns Add to Sterling’s Woes
The Pound to US Dollar exchange rate completed a -300 pip weekly depreciation at the start of this week’s session as the fear of a slowing economy was compounded by additional uncertainty relating to the political situation and Brexit.
Foreign secretary Boris Johnson appeared to undermine Prime Minister Theresa May with a statement on Brexit that went beyond the carefully agreed cabinet position outlined by the PM recently in Florence.
Some believe that Boris is posturing towards a leadership challenge and subsequently investors started pricing the possibility of another general election into GBP/USD.
PMI Data On Tap
Also weighing on Sterling over the past few days has been a string of soft private sector reports.
The manufacturing index slowed unexpectedly in September and the construction activity gauge pointed to contraction for the first time in 14 months.
If Wednesday’s dominant service sector PMI, which accounts for over 70% of UK growth, also comes in below the 50.0 mark that separates growth from contraction then we could see another leg lower in GBP/USD.
On the agenda this week in the US is the non-farm payrolls report, which is tipped to come in at 80,000 for September, significantly lower than the 156,000 gain registered in August.
The expected dip in job creation is due to the damage caused by Hurricanes Harvey and Irma, meaning that the Fed could categorise a soft result as an anomaly and press ahead with plans to tighten policy later this year. Under this scenario, the US Dollar would likely avoid any large-scale losses following the NFP report.