Pound to US Dollar Exchange Rate Forecast: Rising US Inflation to Boost Fed Interest Rate Hike Odds

Update: US-China Trade Tensions Forecast to Dominate GBP/USD Exchange Rate Outlook

Developments in trade tensions between the US and China are likely to provoke additional volatility for the Pound to US Dollar (GBP/USD) exchange rate in the near term.

While there are hopes that the Trump administration could back away from provoking a full-blown trade war the potential for a fresh deterioration in relations could weigh heavily on the US Dollar (USD).

So long as the White House continues to pursue a more aggressively protectionist policy outlook USD exchange rates remain vulnerable to political jitters.

US Dollar Softens as Unemployment Holds Stubbornly at 4.1%

Markets were once again disappointed as the US unemployment rate failed to dip below 4.1% in March, offering support to the Pound to US Dollar (GBP/USD) exchange rate.

This suggests that some degree of slack remains within the US labour market, giving the Federal Reserve potential pause.

However, as the accompanying average hourly earnings data revealed a fresh acceleration in wage growth the downside potential of the US Dollar (USD) was still limited ahead of the weekend.

As Fed policymakers are more likely to focus on the wage data for the time being, given its likely impact on inflation, the odds of the central bank pursuing a more aggressive pace of monetary tightening over the course of the year have increased.

Easing concerns over the prospect of a US-China trade war also helped to shore up USD exchange rates after a week of market jitters.

Improving UK House Prices Offer Pound Support

A better-than-forecast acceleration in the Halifax house price index for the three months to March gave the GBP/USD exchange rate a rallying point on Monday morning.

A price increase of 2.7% on the year has helped to allay concerns over the health of the UK housing market, offering the Pound (GBP) some degree of support at the start of the week.

Even so, as the measure is considered rather volatile this strength could prove rather short-lived.

Given the recent weakness of mortgage approvals figures the housing market looks set to come under further pressure in the coming months.

With Brexit-based uncertainty still hanging over the domestic outlook the potential for fresh GBP/USD exchange rate weakness remains.

GBP/USD Exchange Rate Forecast to Dip on Weaker First Quarter UK GDP

Further support for the GBP/USD exchange rate could be in store on Wednesday, however, if February’s visible trade balance shows a narrowed deficit.

However, particular focus is likely to fall on the NIESR gross domestic product estimate for the three months to March.

If the estimate suggests that economic growth slowed in the first quarter the mood towards the Pound could deteriorate significantly.

As the ultimate impact of Brexit is yet to be felt any signs of weakening domestic growth look set to weigh heavily on GBP exchange rates, with the future shape of its trade relationships yet to be clarified.

Rising Consumer Prices Forecast to Boost US Dollar Exchange Rates

March’s US consumer price index report is expected to provoke additional volatility for the GBP/USD exchange rate this week.

As forecasts point towards the headline CPI picking up from 2.2% to 2.4% on the year this could give the Fed further encouragement.

Even though the CPI is not the Fed’s preferred measure of inflationary pressure a stronger showing here should still improve the case for another imminent interest rate hike.

If investors see reason to bet on the possibility of the Fed raising interest rates three more times before the end of 2018 the US Dollar is likely to push higher across the board.

Hannah Wilson

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