Pound to US Dollar (GBP/USD) Exchange Rate Forecast to Falter on Downwardly Revised UK GDP

Update: Pound US Dollar (GBP/USD) Exchange Rate Gains Ground Despite Narrowing US Trade Deficit

The Pound to US Dollar (GBP/USD) exchange rate found further support on Thursday afternoon, in spite of the latest US data proving largely positive in nature.

While the advance goods trade deficit narrowed further than forecast in March this failed to offer any particular boost to the US Dollar (USD).

After their recent run of bullish gains USD exchange rates were unable to capitalise on the improved data, with high odds of Federal Reserve action already effectively priced into the US Dollar at this stage.

Pound US Dollar (GBP/USD) Exchange Rate Recovers Ground Despite Muted Retail Sales

The latest CBI reported sales index has remained in negative territory, clocking in at -2 in April. This, however, has not prevented the Pound to US Dollar (GBP/USD) exchange rate from picking up on Thursday morning.

As retail sales volumes were broadly unchanged on the month this was not enough to encourage any fresh Pound (GBP) selling.

Stronger wholesale sales offered some encouragement to investors, meanwhile, with the UK economy still showing signs of strength in spite of easing consumer demand.

With the long-running squeeze on wages apparently at an end this is likely to bolster sales in the months ahead.

Technical support also helped to shore up the GBP/USD exchange rate after the pairing hit its lowest level since March, with investors encouraged to buy back into the softened Pound.

Rising US Bond Yields Dented GBP/USD Exchange Rate

Stronger US data and rising US bond yields have weighed heavily on the Pound to US Dollar (GBP/USD) exchange rate this week.

With markets confident that the Federal Reserve could still raise interest rates up to three more times before the end of 2018 the US Dollar (USD) has seen some bullish gains.

As the yield on 10-year US Treasuries broke above the psychologically important 3% barrier USD exchange rates naturally benefitted, with confidence in the domestic outlook generally improving.

However, this leaves the US Dollar vulnerable to the downside if domestic data fails to live up to expectations in the days ahead.

Further Pound US Dollar (GBP/USD) Exchange Rate Weakness Forecast on Softer UK Growth

The Pound to US Dollar (GBP/USD) exchange rate could come under renewed pressure ahead of the weekend on the back of the latest UK gross domestic product data.

Forecasts point towards a downward revision to the first quarter GDP, which is expected to fall from 0.4% to 0.3% on the quarter.

Even though any loss of momentum can be largely attributed to the negative impact of adverse weather conditions this weaker showing could still weigh heavily on Pound exchange rates.

Softer economic growth would give the Bank of England (BoE) further cause to rethink the prospect of a May interest rate hike, with the case for imminent monetary tightening diminishing.

If investors see reason to lower the odds of a May rate hike the appeal of the Pound is likely to deteriorate once again.

Underwhelming US GDP Forecast to Limit GBP/USD Exchange Rate Downside

Support may be in store for the Pound to US Dollar (GBP/USD) exchange rate ahead of the weekend, however, if US GDP figures disappoint.

As the annualised first quarter GDP is expected to ease from 2.9% to 2.0% on the quarter this could encourage investors to pile out of the US Dollar.

After several days of bullish gains USD exchange rates look vulnerable to any underwhelming domestic data, even though annualised growth of 2.0% would still be a relatively robust reading.

Focus will also fall on the latest personal consumption data, with markets looking for any signs that inflationary pressure within the US economy has continued to strengthen.

In the absence of any significant downside surprises, bets on the prospect of more aggressive Federal Reserve monetary tightening are likely to limit the upside potential of the Pound to US Dollar (GBP/USD) exchange rate.

Hannah Wilson

Contact Hannah Wilson