Pound US Dollar (GBP/USD) Exchange Rate Drops as Odds of BoE Interest Rate Cut Soar

Surprise UK Growth Contraction Drags Pound US Dollar (GBP/USD) Exchange Rate Lower

News that the UK economy contracted 0.3% on the month in November saw the Pound Sterling to US Dollar (GBP/USD) exchange rate extend its slide.

This fell short of forecasts of a monthly stagnation in the gross domestic product, highlighting the extent of the impact that political uncertainty and pre-election jitters had on the economy.

As John Hawksworth, Chief Economist at PwC, noted:

‘November saw a decline in estimated output in most major sectors except construction, although this was offset by small upward revisions in previous estimates of GDP growth in September and October. The weakening of the dominant UK services sector in the autumn is notable and business surveys suggest that output in this sector remained flat in December.’

Although the three-month rolling average showed positive growth of 0.1% this failed to ease anxiety over the economic outlook, with investors doubting the potential for a strong rebound in activity.

Coming on the heels of dovish comments from Bank of England (BoE) policymaker Gertjan Vlieghe this weak showing prompted a sharp increase in bets of an imminent interest rate cut, dragging Pound Sterling (GBP) lower.

US-China Trade Jitters Fail to Encourage USD Exchange Rate Gains

With markets bracing for the US and China to sign off their phase one trade agreement support for the safe-haven US Dollar (USD) proved limited, meanwhile.

While doubts remain over the likelihood of the two sides agreeing a phase two deal before the end of the year this was not enough to give USD exchange rates any particular boost.

Even so, the relative weakness of the Pound still saw the GBP/USD exchange rate trending lower over the course of the day.

A modest uptick in December’s US consumer inflation expectations reading offered a boost to the US Dollar, with the risk of another Federal Reserve interest rate cut appearing to retreat.

US Dollar Looks for Rallying Point on Consumer Price Index Uptick

Demand for the US Dollar could see a greater improvement tomorrow as forecasts point towards a stronger consumer price index.

Although the CPI is not the Fed’s preferred gauge of inflation a stronger showing here could still add to the case for policymakers to leave interest rates on hold for longer.

Any indication that inflationary pressure within the world’s largest economy picked up in December may see the GBP/USD exchange rate shedding further ground on Tuesday.

On the other hand, if the headline inflation rate fails to accelerate as anticipated this may leave USD exchange rates vulnerable to renewed selling pressure.

Weak UK Inflation May Increase Odds of BoE Rate Cut Further

The odds of an imminent BoE interest rate hike could continue to grow on Wednesday, meanwhile, if policymaker Michael Saunders maintains a dovish bias.

However, as Saunders has consistently made the case for a rate cut the ultimate impact of his words may prove limited.

December’s UK consumer price index may also weigh heavily on GBP exchange rates, though, if inflation fails to show signs of ticking higher.

Lacklustre inflation data would add to the case for the BoE to cut interest rates sooner rather than later, encouraging the GBP/USD exchange rate to remain on the back foot.

Louisa Heath

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