Pound to US Dollar (GBP/USD) Exchange Rate Forecast to Remain Under Pressure Ahead of Fed Meeting

Update: Rising US Inflation Encourages Further Pound US Dollar (GBP/USD) Exchange Rate Weakness

The Pound to US Dollar (GBP/USD) exchange rate remained under pressure as March’s US personal consumption expenditure measure strengthened in line with forecasts.

With the Federal Reserve’s preferred measure of inflation clocking in at 1.9% on the year the case for a more aggressive pace of monetary tightening appeared to improve.

Although the day’s US data was not uniformly positive this was still enough to offer US Dollar (USD) exchange rates a fresh boost on Monday afternoon.

Weak UK GDP Drives Pound US Dollar (GBP/USD) Exchange Rate Lower

An unexpectedly sharp drop in the first quarter UK gross domestic product (GDP) prompted the Pound to US Dollar (GBP/USD) exchange rate to slump sharply ahead of the weekend.

Markets were not impressed to find that the UK economy had lost further momentum in the first three months of 2018, with the quarterly growth rate slowing to just 0.1%.

This weaker showing weighed heavily on Pound (GBP) exchange rates on Friday as investors reassessed the underlying health of the economy.

The odds of a May interest rate hike from the Bank of England (BoE) also fell sharply on the back of the underwhelming data, as policymakers now look set to adopt a more cautious stance.

As investors had been pricing in high odds of an imminent monetary policy change this left GBP exchange rates exposed to significant downside pressure.

Robust US Growth Limits GBP/USD Exchange Rate Support

Solid US GDP data, meanwhile, gave the Pound to US Dollar (GBP/USD) exchange rate further cause for weakness.

Although the annualised rate of GDP growth eased from 2.9% to 2.3% in the first quarter this reading still bettered forecast, with markets expressing continued confidence in the outlook of the world’s largest economy.

With consumer spending slowing to a near five-year low, this is expected to be only a temporary weakness, given the tightening of the US labour market.

Even with global geopolitical tensions easing, thanks to thawing relations on the Korean peninsula, US Dollar (USD) exchange rates remained on a generally strong footing.

Hawkish Fed Meeting Could Dent Pound US Dollar (GBP/USD) Exchange Rate

The strength of the Pound to US Dollar (GBP/USD) exchange rate is likely to remain limited ahead of the Federal Reserve’s May policy meeting.

While markets do not expect to see any change in monetary policy on Wednesday the tone of policymaker comments could still drive USD exchange rates.

If the Fed appears to be on track to pursue a more aggressive pace of monetary tightening investors could find fresh incentive to pile into the US Dollar.

On the other hand, any signs that interest rates are not likely to rise three more times before the end of 2018 may leave USD exchange rates vulnerable.

Further volatility for the GBP/USD exchange rate is expected on the back of Friday’s US non-farm payroll report, with any fresh tightening of the labour market set to boost investor confidence.

GBP/USD Exchange Rate Forecast to Find Support on UK PMIs

April’s raft of UK PMIs could offer some support to the Pound to US Dollar (GBP/USD) exchange rate over the course of the week.

After the underwhelming performance of March’s figures investors will be looking to see signs of a rebound at the start of the second quarter.

Particular focus will fall on the services PMI, with forecasts pointing towards a solid uptick in growth on the month.

As the service sector accounts for more than three quarters of UK economic activity a stronger showing here could be enough to give Pound exchange rates a rallying point.

However, with uncertainty over Brexit and the future of the Irish border still hanging over the domestic outlook, the Pound to US Dollar (GBP/USD) exchange rate may struggle to find any significant upside.

Hannah Wilson

Contact Hannah Wilson