Pound US Dollar Forecast: Can GBP/USD Exchange Rate Hold onto Two-Month Highs?

The Pound to US Dollar (GBP/USD) exchange rate is currently trading close to two-month highs due to muted expectations for Federal Reserve tightening in 2018.

Pound Sterling Exchange Rates Survive Autumn Budget

Sterling rallied by around two cents versus the US Dollar last week, surviving a scare on Wednesday when British Chancellor Philip Hammond gave his Autumn Statement.

The budget featured relatively little in the way of additional austerity or pro-growth policies, but analysts were concerned with the Office for Budget Responsibility’s latest forecasts.

2017 UK GDP was revised down from 2.0% to 1.5%, with future growth also downgraded. The outlook for productivity growth was also revised down, from 7.5% to 5.7% over the next five years.

While the latest economic projections paint a bleak picture, GBP/USD actually managed to appreciate following the Autumn Budget.

Federal Reserve Minutes Report Weighs on US Dollar (USD) Exchange Rates

Demand for the US Dollar (USD) cooled following the latest Federal Reserve minutes report, which revealed that policymakers were growing concerned with the soft outlook for inflation.

The central bank communiqué left the door open to a widely anticipated rate rise in December, however, the outlook for further tightening in 2018 appeared to recede.

The fact that US President Donald Trump’s pro-growth agenda has failed to take off, with ambitious tax reform and infrastructure spending policies nowhere near ratification, appears to be weighing on US inflation expectations.

GBP/USD Forecast: Will the Pound Push Beyond 2-Month Highs this Week?

Going into this week’s session, the big question is whether Sterling’s recent strength versus the US Dollar is sustainable.

And, considering that GBP/USD has only managed to hold above the current level for more than two days once since Brexit, it’s entirely likely that profit-taking will take GBP/USD lower over the coming days and weeks.

A lot will depend on the outcome of this week’s crunch Brexit talks.

The UK government has been given until 4th December to make ‘sufficient progress’ on issues such as Britain’s divorce bill, the Irish border and the rights of EU citizens in order for Brexit negotiations to move on to future trade.

If Britain manages to satisfy EU demands on these key issues by next Monday then demand for Sterling could be bolstered by hopes of a transitional Brexit deal. However, if the EU is not satisfied with the UK government’s proposals, GBP/USD will likely plunge.

Data points to look out for include the US third quarter GDP report, which is tipped to show growth of 3.2%, and the UK manufacturing PMI, which is expected to see output rise minimally from 56.3 to 56.5. However, barring any big surprises, the data will probably take a backseat to Brexit developments.

Data Affecting the GBP/USD Forecast This Week

28th November USD Consumer Confidence Index (NOV)

29th November USD Gross Domestic Product Annualized (QoQ) (3Q S)

29th November USD Yellen Appears before Joint Economic Committee of Congress

30th November USD PCE Core (YoY) (OCT)

1st December GBP Markit UK PMI Manufacturing s.a. (NOV)

Josh Ferry Woodard

After leaving university in 2011 Josh briefly worked as a currency analyst in the South West of Cornwall. Josh continued monitoring the currency markets and publishing exchange rate analysis after moving to London in 2012, with a particular focus on the impact of economic and political stimuli on forex. Josh was a regular contributor to The Telegraph’s weekly currency feature for several years.

Contact Josh Ferry Woodard