Is the Pound to US Dollar Exchange Rate Forecast to Hit New Lows?

Update: Pound to US Dollar Exchange Rate Recovers Slightly from Lows Following Wednesday’s US Data

After nearing its worst 2018 interbank levels again, the Pound to US Dollar (GBP/USD) exchange rate recovered slightly in the afternoon.

GBP/USD rebounded from its daily lows following the publication of some underwhelming US data, including contractions in US housing data and disappointing oil stocks.

US housing starts were forecast to come in at -1.1% month-on-month in April, but instead slumped to -3.7%. The housing starts figure printed at 1.287m rather than the forecast 1.31m.

As the US data disappointed, the US Dollar’s (USD) strong streak paused and Sterling (GBP) edged higher.

Despite this, GBP/USD was still lower on the day and is on track to lose around half a cent this week.

Pound to US Dollar Exchange Rate Tumbles on Persistent US Dollar Strength

A lack of supportive UK data over the past week has meant the Pound to US Dollar (GBP/USD) exchange rate has tumbled to its worst levels of the year so far. GBP/USD losses are being driven largely by expectations of policy divergence among major central banks.

The US Dollar’s (USD) recent strong streak saw a pause last week amid underwhelming US inflation results from April, which actually helped GBP/USD to advance slightly throughout the week.

This week so far though, GBP/USD has tumbled from the interbank level of 1.35 to around 1.34, where it currently trends. On Tuesday, the GBP/USD interbank hit a 2018 low.

Essentially, expectations that the Federal Reserve could be an outlier among major central banks with its hawkish tone in 2018 has left the US Dollar much more appealing.

It is especially appealing against rivals like the Pound (GBP), which has been sold on hints that the Bank of England (BoE) could leave UK monetary policy frozen all year despite investors previously betting that the bank could hike rates in 2018.

Pound Sterling (GBP) Exchange Rates Fail to Find Fresh Support in UK Job Market Report

Tuesday’s UK data did little to inspire change in the Pound Sterling exchange rate (GBP) outlook, as Britain’s latest job market results largely met forecasts.

While the UK unemployment rate remained at an impressive 4.2% as expected and the average wages rate edged above the inflation rate as forecast, this did not notably impact Britain’s economic outlook.

UK wages improved from 2.8% to 2.9% excluding bonuses, and slipped from 2.8% to 2.6% including bonuses.

Sterling’s strength may actually have been held back, by projections showing that UK labour productivity had contracted -0.5% in Q1 2018.

It weighed on an otherwise solid UK job report. Alongside recent disappointing UK inflation and growth stats, it indicated that the strength of Britain’s economic activity was highly lacking.

US Dollar (USD) Exchange Rates Continue to Benefit from Fed Rate Hike Bets

US Dollar (USD) Investors are increasingly expecting that the Federal Reserve will hike rates four times total throughout 2018 – and that the bank could be considerably more hawkish this year than most of its major counterparts.

With the Fed expecting to hike US rates multiple times and the Bank of England (BoE) no longer expected to hike UK rates at all, this has been a fundamental reason behind GBP/USD losses.

US Dollar strength has been supported further by domestic data too, which has generally been solid besides last week’s US inflation figures.

For example, Tuesday saw the publication of US retail sales stats from April. Retail sales came in at 0.3% month-on-month and 4.7% year-on-year, while the previous figures were revised higher to 0.8% and 4.9% respectively.

It indicated that consumer spending was strong and this caused US 10-year Treasury bond yields soaring to their best levels in seven years.

According to Viraj Patel from ING:

‘Today could see a repeat of yesterday. Momentum would certainly seem to back a further Dollar advance with little to stop US 10-year Treasury yields pushing to 3.20 percent.’

Pound to US Dollar (GBP/USD) Forecast: Central Bank Speculation Remains in Focus

If investors continue to become increasingly confident that the Federal Reserve will hike US interest rates four times in 2018, the Pound to US Dollar (GBP/USD) exchange rate could see further losses before the end of the week.

Multiple Federal Reserve officials will be holding speeches before the end of the week, and Bank of England (BoE) policymaker Andy Haldane will be holding a speech on Thursday too.

Unless Haldane indicates that UK interest rates could still rise this year, the Pound is unlikely to see a boost in demand before the end of the week.

As a result, GBP/USD is on track to end this week lower. The pair could see a shift in direction next week though, depending on the results of key UK inflation and growth reports.

UK inflation and Fed minutes on Wednesday, UK retail sales on Thursday and UK growth and US goods orders on Friday are likely to influence the Pound to US Dollar (GBP/USD) exchange rate next week.

Adam Solomon

Adam joined the team at TorFX soon after graduating from University in 2005 with a degree in Journalism. Since then Adam has advanced to become both Head of Trading and Head of Treasury. His keen interest in the currency market and knowledge of what drives exchange rates makes him perfectly positioned to produce regular market updates focused on the movements of the major currencies.

Contact Adam Solomon