As Fed Rate Hike Looms Large, GBP Cowers in the Shadows
Analysts Forecast Weaker Demand for GBP as Fed Takes Centre Stage
On Tuesday and Wednesday next week, the Fed FOMC will be convening to discuss economic conditions vis-à-vis a Fed rate hike. The federal funds rate is currently at 0.50% – 0.75%, and economists are all but certain that Fed chair Janet Yellen will pull the trigger and increase rates by 25-basis points. The current probability of a rate hike on Wednesday, 15 March is now 84.1%. If we extrapolate to Wednesday, 3 May 2017, there is an equally strong probability of a rate hike at 78.3%. If the Fed moves as expected, the higher interest rate will drive up USD demand. This naturally lends itself to sales of other currencies such as the GBP, JPY, EUR et al.
Imminent Fed Decision to Boost USD and Soften GBP
Indeed, the performance of the US economy is unprecedented. Wall Street is rallying near record levels, what with the Dow Jones trading around 21,000. Much the same is true of the NASDAQ and the S&P 500 index which are rallying strongly. Across the Atlantic, the FTSE 100 index remains a strong prospect, while the FTSE 250 index is benefiting from the short-term strength of the GBP. But the most significant news is the strength of the USD in anticipation of next week’s Fed FOMC meeting. The US dollar index is now trading at 101.84, up 0.14%, or 0.14 points (Tuesday, 7 March 2017). The 52-week high of this broad measure of USD strength is 103.82. It is clear from current trends that the DXY is increasing. The Fed decision will certainly bolster the performance of the greenback against competing currencies.
Presently, the GBP/USD pair is trading at 1.2189, down 0.43% or $0.0051. This is to be expected given the bullish sentiment for the greenback. But there are several other reasons why the GBP is flagging. For starters, consumer spending has run out of momentum. As Brexit fears mount, retail sales data in the United Kingdom is retreating. This is also the first time in the UK since 2011 that non-food sales have declined through February. Brexit-related declines will give rise to higher inflation in the UK. Britons are now feeling the pinch as major financial institutions are talking about relocating their headquarters from the City of London to other capitals throughout Europe. The 12-month average of retail sales in the UK is 0.9%, but the increase in total sales in February was just 0.4%. This is a deeply disturbing to the overall health of the UK economy.
Weak Economic Data in the UK Weighing Heavily on the GBP
It’s not only everyday items that are seeing weaker demand, it’s also high-end items. This is the fifth successive month that nonessential items reported a decline. People in the UK are now receiving less product for their cash, and this is known as shrinkflation. Even the housing market in the UK has reported a slowdown, with housing prices increasing by just 0.1% in February (month on month). The industry forecast was 0.4%, indicating a tremendous shortfall in performance. Analysts will be watching the Bank of England (BOE) carefully. Weak consumer expenditure will not be met with a reversal in accommodative monetary policy. In other words, we can expect low interest rates and excess money to continue flooding the UK economy so that the velocity flow of money increases in the UK. This naturally results in a weaker GBP, which will then dovetail with a Fed rate hike to push the GBP/USD pair to record lows.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.