Despite the Pound being up across the board, Pound to US Dollar exchange rates remain close to their historic lows. Brexit is still the number one concern for those trading the currency pair, but the potential for further US interest rate hikes in 2017 could push exchange rates into weaker territory.
It’s widely anticipated by the markets that the US will enjoy its first interest rate hike in nearly a year, in fact, the Fedwatch Tool puts the odds close to 93% since the close of Friday. It’s therefore likely that a US interest rate hike has been priced in to the current value of the US Dollar, and any subsequent changes are unlikely to move rates tomorrow.
In contrast, if the FED vote in favour of waiting a US Dollar sell-off may emerge as investors seek to protect profits.
In any event, the current GBP/USD position remains attractive for now, but with the potential for further interest rate hikes in 2017 Pound to US Dollar exchange rates could be in for a bumpy ride.
Pound to US Dollar position to weaken in 2017?
Considering that current GBP/USD rates have recovered since the low of 1.21 witnessed in October, the potential for further rate hikes next year could see GBP/USD test these levels once again. Donald Trump – The President Elect – has on occasions critisised the Chairlady Janet Yellen for keeping interest rates low for too long. With Trump assuming his position in January, its likely that he will put pressure on the FED to increase rates at a quicker rate.
The US economy is however, performing strongly in recent months, whilst inflation remains below the FED’s key target of 2%, FOMC members could move rates higher to prevent the economy from overheating. Unemployment rates are now below the 5% mark nearing max capacity for the US economy, prompting further hikes next year.
Brexit and Donald Trump
The prospect of Article 50 in March and the rise of Donald Trump could also add pressure on the GBP/USD position. The differences between Trump and Brexit are becoming more transparent since he won the US elections. Whilst both share a protectionist stance, Trump is seen somewhat as positive for US business. Brexit however, is at the detriment of the UK’s huge financial sector.
There are some that share hopes of a special UK-US trade deal following the result of Brexit-Trump, but skepticism should be taken considering a number of campaign promises in which he has turned his back on.
With the UK set for further uncertainty in March and the prospect of a strong US economy and thus, higher interest rates, the Pound to US Dollar position could be set for further falls in 2017.
