Although markets remain confident in the prospect of an imminent Bank of England (BoE) interest rate hike, the Pound to US Dollar (GBP/USD) exchange rate has struggled to hold onto a stronger footing.
Even so, the Pound rallied strongly across the board on Wednesday after the third quarter UK gross domestic product report bettered expectations.
As economic growth accelerated from 0.3% to 0.4% on the quarter, exceeding the BoE’s forecast, this was seen to add further weight to the case for a November rate hike.
However, this was still some way short of the long-term growth average, leaving the Pound vulnerable to renewed pressure once the initial boost of the upside surprise faded.
A significant slump in the CBI retailing reported sales index for October saw the GBP USD exchange rate rapidly reversing its earlier gains, with the index plunging from 42 to -36 to reach its lowest level since March 2009.
US Dollar (USD) Exchange Rates Benefit From Softness of Rivals
While US data proved somewhat mixed over the course of the week this was not enough to particularly weigh down US Dollar (USD) exchange rates.
Even though the advance goods trade deficit widened further than forecast in September, and pending home sales continued to contract, investors maintained a generally bullish view of the ‘Greenback’.
In part this was due to the relative weakness of the Euro, which softened significantly in the wake of a dovish policy announcement from the European Central Bank (ECB).
Markets have also been encouraged by signs that the Trump administration may be able to deliver on its promised tax reforms, to at least some degree.
Anticipation ahead of the announcement of the next Federal Reserve Chair also offered support to USD exchange rates, with the central bank looking set to step up its monetary tightening cycle regardless of the final choice.
Weaker US GDP Could Weigh on Demand for US Dollar
The relative strength of the US Dollar (USD) leaves it vulnerable to downside pressure if the annualised third quarter gross domestic product data falls short of forecasts.
Investors expect to see a slight loss in momentum on the quarter that should drag the annualised growth rate down from 3.1% to 2.5%.
Even so, this is likely to be at least partially the result of recent hurricane damage and may not signal any particular weakening in the outlook of the world’s largest economy.
If growth surprises to the upside, though, this could see the GBP USD exchange rate extend its slump further ahead of the weekend, especially if the general sense of market risk aversion persists.
Pound (GBP) Exchange Rate Upset Possible on BoE Policy Decision
Further volatility is likely for the Pound as markets brace for the BoE’s November policy decision on Thursday.
While investors have already priced in high odds of a 25btps interest rate hike there is the potential for additional GBP gains if policymakers prove more hawkish than anticipated.
On the other hand, if the Monetary Policy Committee (MPC) shows greater signs of a split, or even votes against any immediate policy change, this could weigh heavily on Sterling.
As some policymakers have already expressed concerns over the wisdom of tightening monetary policy at this juncture the potential for a disappointment is likely to limit the GBP USD exchange rate in the near term.