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Pound Dollar Exchange Rate Trends Higher after Fed Meeting, Pound Euro Remains Softer

In the wake of the Federal Reserve’s uneventful September policy meeting the Pound to US Dollar exchange rate has remained on an uptrend, benefitting from market disappointment over the less hawkish tone of policymakers than had been expected.

  • UK government on track to miss 2016-2017 borrowing target – Persistence of borrowing deficit weighed on Pound demand
  • Less dovish ECB Economic Bulletin boosts Euro demand – Odds of further monetary loosening seen to ease
  • Fed’s hawkish hold failed to prevent GBP USD exchange rate rally – Investor disappointment undermined US Dollar strength
  • GBP EUR exchange rate forecast to rally on weaker Eurozone consumer confidence – Outlook of currency union remains muted

The Euro has experienced a fresh boost on the back of the Fed’s decision, with concerns over further policy divergence from the ECB easing.

Pound Sterling (GBP) Weighed Down by Disappointing UK Borrowing Figures

Worries over the outlook of the UK economy were not eased by the news that the government remains on track to overshoot its borrowing target for the 2016-2017 fiscal year. While August’s public sector net borrowing figure modestly bettered expectations to clock in at 10.1 billion rather than 10.4 billion this was not enough to offer the Pound (GBP) support. The fact that the UK remains reliant on overseas borrowing added fuel to Brexit-based anxiety, particularly as the wide deficit could leave Chancellor of the Exchequer Phillip Hammond with little room to boost the economy in the Autumn Statement.

Confidence in Sterling could improve on Thursday if the latest CBI trends figures point towards robustness within the domestic economy. Forecasts are for selling prices to have strengthened on the month in September, while industrial orders are thought to have remained stable. This could offer investors encouragement to buy back into the weakened Pound at this juncture, although any downside disappointment could see GBP exchange rates extending their losses further.

Weak Eurozone Consumer Confidence Forecast to Shore up GBP EUR Exchange Rate

Following the Federal Reserve’s decision to leave interest rates on hold for another month the appeal of the Euro (EUR) has improved, benefitting from the weakness of the US Dollar (USD). Investors were also encouraged by the tone of the European Central Bank’s (ECB) Economic Bulletin, which firmed the opinion that the bank is not in the mood to loosen monetary policy further. This improved the appeal of the single currency, suggesting that the ECB is not overly concerned with the weakness of domestic inflation, at least for the time being.

Hopes are not especially high for September’s Eurozone Consumer Confidence Index, which is expected to show that sentiment across the currency union has remained subdued over the last month. As researchers at BNP Paribas have noted:

‘The expected fall to -9 will still leave consumer confidence at above-average levels, and therefore, consistent with solid consumer spending growth. However, with confidence peaking in 2015, the trend is now one of gradual decline, consistent with our view that the overall economy will see some moderation in growth in H2 2016.’

Should sentiment have weakened further on the month the Pound to Euro (GBP EUR) exchange rate could trend higher, as this would indicate continued slowness within the Eurozone. Commentary from ECB President Mario Draghi could also weigh on the single currency, assuming that he does not adopt a sufficiently hawkish outlook.

GBP USD Exchange Rate Trends Higher Following Fed’s Hawkish Hold

While markets had not anticipated any move from the Fed overnight the ‘Greenback’ nevertheless reacted with disappointment to the less hawkish tone of Chair Janet Yellen’s comments. Although three policymakers were revealed to have voted for an immediate rate hike the majority remained cautious of raising rates too soon. Investors are continuing to bet that December will see a return to the bank’s monetary tightening cycle, even though the possibility seems to remain conditional on jobs data remaining encouraging. Regardless, with worries over the strength of the US economy persisting, the Pound to US Dollar (GBP USD) exchange rate made gains on Thursday morning.

Further US Dollar volatility could stem from the afternoon’s jobless claims figures, which are forecast to show that unemployment remained virtually flat on the week. This could offer a rallying point to the ‘Greenback’, seeming to point towards another solid print of labour market data for September. Should the day’s raft of US housing data also prove encouraging then the GBP USD exchange rate is likely to struggle to hold onto its gains.

Current GBP, EUR, USD Exchange Rates

At the time of writing, the Pound to Euro (GBP EUR) exchange rate was trending lower at 1.1632, while the Pound to US Dollar (GBP USD) pairing was making gains in the region of 1.3074.