A shift in central bank interest rate expectations drove the Pound lower against the US Dollar (GBP/USD) last week and this trend could continue if UK GDP disappoints.
BoE Rate Hike Bets Soften Despite Sturdy Data, GBP Exchange Rates Pressured
Although UK inflation rose to a five-year high of 3.0% and British wage growth came in slightly above market expectations, at 2.2%, the GBP/USD exchange rate depreciated by around -100 pips last week.
Fears over the UK economic outlook were sparked when retail sales printed at -0.7% for the month of September, while cautious comments from the Bank of England raised fears that Threadneedle Street could delay hiking rates.
Indeed, market futures suggested the probability of a BoE rate rise on 2 November fell from 70% to 65% last week.
On the other side of the Atlantic, Federal Reserve December rate hike expectations grew from 73% to 83% following a speech from Fed Chairwoman Janet Yellen, in which she stated inflation was likely to hit the 2.0% target over the next couple of years.
GBP/USD Exchange Rate Could Suffer on Weak UK GDP Report
The recent shift in rate expectations, in the US Dollar’s favour, suggests that markets could drive the GBP/USD exchange rate lower over the coming weeks.
A soft UK Q3 GDP report would likely exacerbate this process. On the other hand, if the print beats estimates of 0.3% quarterly, and 1.5% annualised, growth then we could see UK rate hike bets rise and Sterling appreciate.
US GDP is tipped to have cooled from an annualised rate of 3.1% to 2.6% in Q3 but this is not likely to have a massive impact on December rate hike bets.
While Brexit and UK political uncertainties remain a key concern, their unpredictable nature offers scope for both negative and positive surprises.
Providing UK Prime Minister Theresa May avoids any fresh domestic political challenges, recent conciliatory comments from EU leaders suggest Brexit progress is being made, albeit at a slow pace. So long as Brexit sentiment remains positive, this progress could support Sterling versus the ‘Greenback’.
Data Released This Week
24th October USD Markit US Manufacturing PMI (OCT P)
25th October GBP Gross Domestic Product (QoQ) (3Q A)
25th October GBP Gross Domestic Product (YoY) (3Q A)
26th October USD Advance Goods Trade Balance (SEP)
27th October USD Gross Domestic Product (Annualized) (3Q A)