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GBP/USD Fluctuates on Upbeat Private Sector Activity and US Fed Rate Hike Anticipation

Friday’s high: £1.3981

Friday’s low: £1.3888

GBP/USD Exchange Rate Pressured as US Manufacturing Production Smashes Forecasts

The Pound US Dollar (GBP/USD) exchange rate fluctuated last Friday, falling later into the day as markets responded to a surprising run of upbeat private sector figures from the US.

According to the US Federal Reserve, industrial production (a measure of output in factories, mines and other utilities) surged by 1.1% in February, beating market forecasts of a modest 0.4% rise and marking the best result in over four months.

This acceleration was predominantly due to strong output gains in US manufacturing – Indeed, manufacturing production jumped by 2.5% year-on-year – the highest annual reading in factory output since July 2014.

Beyond this, the US University of Michigan consumer sentiment index soared to 102 in March, beating February’s score of 99.7 and the market forecasts of 99.3.

This reading was an all-time record for favourable assessments of current economic conditions in the US, with optimism largely supported by US President Donald Trump’s recent sweeping tax reform measures.

These upbeat readings underlined the current strength of the US private sector, but debate is ongoing as to whether the US Federal Reserve will raise interest rates this Wednesday.

US Dollar Outlook: US Fed Rate Decision and Brexit Negotiations in the Spotlight

This week is going to be a big one for US and UK data.

Taking centre stage will be the US Federal Open Market Committee (FOMC) rate decision, with market anticipation reaching fever pitch in recent weeks after new Fed Chairman Jerome Powell and Fed President William Dudley (amongst others) made the case for 4 rate hikes this year, rather than the initially planned 3.

Markets are currently slightly torn, however, with recent soft inflation and wage growth readings for the United States seeming to temper giddy expectations that the bank will move at such a hasty pace.

If the bank does raise its baseline interest rate then the ‘Greenback’ will likely surge in demand, putting a great deal of pressure on the majors.

Across the pond, however, the focus will be on Brexit negotiations, with UK Brexit Secretary David Davis due to meet with EU Chief Negotiator Michel Barnier to try and hash out details of the transition period before the looming EU leaders’ summit.

Whilst Downing Street is confident that it will be capable of securing the transition period, investors are very concerned that notable impasses will remain, particularly regarding the Irish border.

To this end; a lack of demonstrable progress in negotiations could risk delaying trade talks even longer, potentially dragging the UK closer to a Brexit ‘cliff-edge’ and leaving businesses without clarity.

If this occurs then the markets (fearing uncertainty) could flee Sterling, potentially driving GBP/USD even lower.

Key Events – Week Starting March 19th

Tuesday

09:30 GBP Consumer Price Index

Wednesday

09:30 GBP Jobless Claims Change

09:30 GBP Average Weekly Earnings

18:00 USD US FOMC Rate Decision

Thursday

12:00 GBP Bank of England Bank Rate

12:30 USD Initial Jobless Claims

13:45 USD Markit US Manufacturing PMI

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To keep up to date with the US Dollar, visit the USD blog in our Currency News section.

Arron Morris
Senior Currency Broker
T: 01442 892 065

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