In spite of Bank of England (BoE) policymakers voting unanimously to raise interest rates on Thursday the Pound US Dollar (GBP/USD) exchange rate soon came under renewed pressure.
Even as interest rates increased from 0.50% to 0.75% the mood towards the Pound deteriorated, largely driven by the latest commentary from BoE Governor Mark Carney.
As Carney emphasised that the future path of monetary policy remains gradual, indicating that interest rates are unlikely to rise again for some time, investors saw little reason to favour the Pound.
Analysts at ANZ noted:
‘While further moves in the policy rate will likely be very gradual against a backdrop of Brexit, Carney noted “we can’t be handicapped or tied by the range of Brexit possibilities”. The MPC estimate the long-run neutral rate is in the range of 2-3%, so with normalisation expected to remain gradual, monetary policy is set to remain accommodative for some time yet. Markets are not fully pricing in another hike until mid- to late-2019.’
The 25btp interest rate hike had already been effectively priced into GBP exchange rates ahead of Thursday’s announcement, leaving Sterling more vulnerable to downside pressure.
US Dollar Exchange Rates Push Higher Ahead of US Unemployment and Wage Data
The GBP/USD exchange rate could come under further pressure this afternoon on the back of the latest US labour market data.
Forecasts point towards a slightly weaker headline non-farm payrolls figure, although this is unlikely to undermine demand for the US Dollar.
Investors expect to see a fresh decline from 4.0% to 3.9% in the unemployment rate for July, showing that the US economy is continuing to take up slack.
However, even if unemployment levels continue to fall the US Dollar may struggle to extend its gains ahead of the weekend.
Any signs of weakness in July’s wage data could weigh heavily on USD exchange rates meanwhile.
As analysts at TDS commented:
‘We expect wage data to also reinforce a relatively downbeat report with a benign 0.2% m/m rise in average hourly earnings.
‘We see a high bar for a stronger print as m/m gains north of 0.2% are few and far between for this survey reference week (only three times since 2007). That should keep the y/y pace at 2.7%, reinforcing that wages remain stuck in recent ranges.
‘No rest for the weary after a week of notable central bank shifts, save for the Fed. The payrolls report should garner notable interest from FX markets and if our forecast is correct in expecting a lower outcome on both jobs and wages relative to the market, the USD is vulnerable.’
On the other hand, if wage growth betters expectations this may keep the US Dollar on a stronger footing against its rivals.
Disappointing UK Services PMI Weighs Down Pound US Dollar Exchange Rate
Confidence in the Pound continued to deteriorate on Friday morning as July’s UK services PMI fell short of forecast.
Investors were not impressed to find that the index had dipped from 55.1 to 53.5, a much sharper decline than anticipated.
This indicates that the service sector failed to gain any particular boost from recent hot weather and the World Cup, highlighting a persistent trend of weakness within the domestic economy.
The weaker growth naturally exacerbated market concerns over the economic outlook, particularly as Brexit-based jitters only look set to mount further.
As the UK economy started the third quarter on a softer footing the BoE is likely to maintain a more dovish outlook in the months ahead, further limiting the prospect of monetary tightening.
Markets remain cautious of the prospect of the UK losing further economic momentum ahead of the Brexit deadline, keeping the Pound under pressure.
GBP exchange rates could find a rallying point next week, however, on the back of the second quarter UK gross domestic product.
If growth proves stronger than forecast the appeal of the Pound is set to improve, even though the odds of a more hawkish BoE outlook remain limited.
International Money Transfer? Ask our resident FX expert a money transfer question or try John’s new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.
TAGS: Pound Dollar Forecasts