Trade War Fears Support Pound US Dollar Exchange Rate Ahead of State of the Union Address

Pound US Dollar (GBP/USD) Exchange Rate Benefits from US Trade War Fears

Worries over the Trump administration’s approach to trade have helped to buoy the Pound to US Dollar (GBP/USD) exchange rate over the course of the last week.

The rather belligerent tone on display from US officials at the World Economic Forum gave fresh weight to fears of a potential trade war with China; something which would not bode well for the US economy.

Furthermore, US Treasury Secretary Steven Mnuchin’s comments that a weaker US Dollar (USD) would be favourable for the domestic outlook also encouraged investors to pile out of the currency.

Additional discouragement greeted the annualised fourth quarter US gross domestic product, which eased from 3.2% to 2.6% on the quarter.

With the Euro (EUR) pushing higher on the back of encouraging European Central Bank (ECB) comments there was little reason to buy into the US Dollar ahead of the weekend.

Pound (GBP) Support Limited despite UK GDP Beating Forecasts

Although the fourth quarter UK gross domestic product beat forecasts, accelerating to 0.5% on the quarter, this failed to extend the gains of the GBP/USD exchange rate.

While the economy showed signs of picking up momentum heading into 2018 the impact of the report was relatively muted, given that this preliminary estimate is only based on a limited selection of data.

As a result the stronger showing could well be subject to a downwards revision in subsequent readings, preventing GBP exchange rates from taking particular encouragement from the data.

All in all, confidence in the outlook of the UK economy remains rather subdued, given the high level of uncertainty that continues to surround the issue of Brexit.

Persistent divisions within the ranks of the Conservative party over the issue do little to improve the appeal of the Pound (GBP), leaving the currency vulnerable to domestic political jitters.

US Dollar Could Rally if Fed Looks Optimistic

Downside pressure on the GBP/USD exchange rate is likely to increase ahead of Wednesday’s Federal Open Market Committee (FOMC) policy meeting, even though no action is expected at this stage.

Markets will be keen to gauge the outlook of policymakers once again and assess whether the odds are shifting towards a more aggressive pace of monetary tightening over the course of the coming year.

If an increasing proportion of FOMC members appear to be adopting a more optimistic tone on the subject of the economic outlook this could see the US Dollar trending higher on bets of additional interest rate hikes to come.

Politics is also expected to remain a key influence on USD exchange rates this week, with investors bracing for the latest State of the Union address.

Any fresh reiteration of protectionist rhetoric could set the US Dollar on a renewed downtrend, with markets still largely wary of the ultimate impact of the Trump administration’s policies.

GBP/USD Exchange Rate Weakness Forecast on UK Consumer Credit Data

Even with no change forecast for December’s UK net consumer credit figure the data still looks set to provoke some changes in the GBP/USD exchange rate.

As speculation has picked up in recent days over the prospect of an imminent Bank of England (BoE) interest rate hike investors are looking for further evidence to support this belief.

Given that policymakers have expressed concerns over the heightened levels of consumer credit, any easing would offer support to GBP exchange rates.

Focus will also fall on January’s round of UK PMIs, which could indicate the economy has consolidated its strength going into 2018.

Hannah Wilson

Contact Hannah Wilson