Despite last week’s seemingly hawkish Bank of England (BoE) policy decision, markets have returned to wondering whether or not the bank will hike UK rates at all this year and the British Pound to US Dollar (GBP/USD) exchange rate has tumbled. Investors are awaiting key UK and US data due for publication on Friday.
Since the month of June began, GBP/USD has generally trended with a downside bias and could be on track to have lost over two cents throughout the month. GBP/USD opened this week at the level of 1.3260 and on Thursday was trending close to a low of 1.3072. This was the lowest GBP/USD level in over seven months – since November 2017.
GBP Pressured by Brexit and Bank of England Uncertainties
The usual suspects weighed on Pound demand on Thursday, the same two factors which have been the primary force of Pound movement throughout the year so far.
The Bank of England’s (BoE) hawkish tone in its June policy decision last week was nowhere to be seen in speeches from policymakers this week.
Incumbent Bank of England policymaker Jonathan Haskel warned on Brexit uncertainties and noted that Britain’s economic outlook could have hidden slack during his speech earlier in the week.
This worsened concerns that the BoE could take a turn for the more dovish when Haskel’s term begins in September.
On top of this, BoE Governor Mark Carney focused on Brexit uncertainties in his speech on Wednesday, arguing that the EU needed to do more to prepare the financial sector and businesses ahead of Brexit.
As Carney hesitated to indicate when the bank will next hike UK interest rates, BoE interest rate hike bets have remained limited.
According to David Madden, market analyst from CMC Markets in London:
‘Carney’s warnings that there would be turmoil if an agreement is not reached before the UK leaves the EU is putting some pressure on Sterling,’
Markets became increasingly jittery over Brexit ahead of this week’s EU Summit, where analysts warn there may not be much further progress made on Brexit negotiations. In fact, the summit may instead highlight the lack of progress in recent months.
Niels Christensen, currency analyst from Nordea in Copenhagen, said:
‘We have the EU summit and there is always nervousness around Brexit. There are also concerns about no interest rate hikes. That’s all adding up to the negative sentiment,’
USD Strength Limited as Trade Uncertainties and Strong Rivals Weigh
While the US Dollar has seen solid gains against a week Pound this week so far, it rebounded slightly from its best levels on Thursday this made it easier for GBP/USD to recover a little from its worst levels.
The US Dollar’s weakness was caused by persisting concerns about trade tensions between the US and rival nations impacting the US economy, making investors looking for safe havens more likely to buy the Japanese Yen (JPY) instead.
On top of this, some decent Eurozone data this week has left the Euro (EUR) more appealing which only left the US Dollar even weaker.
The US Dollar briefly strengthened on reports that the US trade stance was softening – but other comments from US officials have left markets anxious that the US government does not intend to soften its stance after all.
According to Thu Lan Nguyen from Commerzbank:
‘The latest headlines indicate a slightly softer stance but markets would be wary of reading too much into it for now, which explains the strength of the Yen and the Franc,’
GBP/USD Forecast: Major UK and US Stats Due Friday
Could Sterling rebound from its lows on Friday, or is GBP/USD on track to end the week near its worst levels all year?
This will largely depend on Friday’s influential UK and US ecostats. In what could be this week’s most influential session for Pound trade, Britain’s Q1 Gross Domestic Product (GDP) results will be published in the morning.
UK growth is forecast to have slowed from 0.4% to 0.1% quarter-on-quarter and from 1.4% to 1.2% year-on-year. If the final growth result is even weaker than expected, Bank of England (BoE) interest rate hike bets will fall further and GBP/USD will weaken.
On the other hand though, if UK growth of business investment data is solid then BoE rate hike bets could rise and GBP/USD could rebound from its lows.
A GBP/USD rebound would be even more likely if the day’s US data disappoints. Markets will keep an eye on US Personal Consumption Expenditure (PCE) data from May, and Michigan University’s latest consumer confidence data.
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TAGS: Pound Dollar Forecasts