Pound Sterling to US Dollar (GBP/USD) Exchange Rate Continues to Lose Ground as IMF Downgrades Forecasts

IMF Lowers UK Growth Forecasts Leaving GBP/USD Exchange Rate on Back Foot

UPDATE: The latest International Monetary Fund (IMF) global forecasts left the Pound Sterling to US Dollar (GBP/USD) exchange rate under pressure this morning.

As the IMF lowered its UK growth forecasts and warned the Bank of England (BoE) to adopt a cautious approach to monetary policy in the months ahead the mood towards the Pound (GBP) naturally soured.

Pound Sterling (GBP) Slips as UK Government Spokesman Punctures Market Optimism Over Brexit

UPDATE: Comments from Theresa May’s spokesman saw the Pound Sterling to US Dollar (GBP/USD) exchange rate slump this afternoon, falling -0.5% on the day’s opening level.

As the spokesman highlighted the difference between the optimism of a deal being agreed and the actual agreement itself this prompted demand for Pound Sterling (GBP) to weaken once again.

The tone of the comments suggest that the two sides are not as close to a deal as markets had hoped, putting GBP exchange rates under renewed pressure at the start of the week.

US Unemployment Rate Hits 49-Year Low to Shore up US Dollar (USD) Exchange Rates

The odds of the Federal Reserve raising interest rates again before the end of the year increased in response to September’s labour market data, offering fresh support to the US Dollar (USD).

While the headline change in non-farm payrolls figure fell short of forecast this was not enough to dent market confidence, with investors instead focusing on the unemployment rate.

As the unemployment rate unexpectedly fell from 3.9% to 3.7%, hitting a 48-year low, the chances of Fed policymakers continuing to tighten monetary policy strengthened.

Even though average hourly earnings showed some loss of momentum on the year this failed to discourage investors.

However, the Pound Sterling to US Dollar (GBP/USD) exchange rate continued to gain ground ahead of the weekend in the wake of the data, benefitting from market optimism over Brexit.

Brexit Speculation Supports Pound Sterling (GBP) Exchange Rates

News that Ireland is prepared to support Theresa May’s latest customs proposals helped to boost Pound Sterling (GBP) against its rivals ahead of the weekend.

Signs of progress towards the resolution of the Irish border issue encouraged hopes that the UK and EU will reach a deal in November, reducing the likelihood of a no-deal Brexit.

Even so, GBP exchange rates struggled to hold onto this boost for long, as other hurdles to an imminent Brexit deal remain.

A study by accountancy firm Deloitte warned that anxiety among UK businesses has risen to its highest level since the 2016 referendum, putting fresh pressure on the Pound.

With business leaders still fearful of the disruption that any form of Brexit is likely to bring both hiring and investment plans are remaining on hold, to the detriment of the wider economy.

Weaker UK Growth and Trade to Weigh on GBP/USD Exchange Rate

Further volatility is likely in store for GBP exchange rates over the course of the week as focus turns towards Wednesday’s raft of trade and growth data.

With forecasts pointing towards a widening of the UK visible trade deficit the Pound looks unlikely to find any particular support, even if Brexit anxieties show signs of easing.

August’s monthly gross domestic product reading could also weigh heavily on the GBP/USD exchange rate, as investors anticipate a slowdown in growth from 0.3% to 0.1%.

Fresh evidence that the UK economy is coming under pressure in the wake of the summer spending boost is likely to leave the Pound biased to the downside.

Unless markets see reason to bet on a stronger third quarter GDP the mood of GBP exchange rates is likely to turn bearish.

US Dollar (USD) Exchange Rates to Benefit if US Inflation Data Boosts Fed Rate Hike Odds

Thursday’s US consumer price index data could see the odds of a fourth 2018 Fed interest rate hike increase further if inflation shows fresh signs of acceleration.

Forecasts point towards an uptick in the annual core CPI, which is expected to show an increase from 2.2% to 2.3% in September.

While this is not the Fed’s preferred measure of inflation an increase is still likely to bolster the case for another imminent rate hike.

However, if the headline CPI eases from 2.7% to 2.4% as forecast the mood towards the US Dollar could sour, at least in the short term.

As long as the US labour market continues to demonstrate signs of strength, though, the downside potential of USD exchange rates is likely to prove limited.

Hannah Wilson

Contact Hannah Wilson