GBP USD Exchange Rate Slides after Sharp UK Sales Contraction

April 21, 2017 - Written by David Woodsmith

STORY LINK GBP USD Exchange Rate Slides after Sharp UK Sales Contraction

After March’s UK retail sales data proved worse than expected the Pound US Dollar exchange rate came under renewed pressure.

Investors were wrong-footed to find that sales had contracted -1.8% on the month, indicating that consumers have started to dramatically cut back on spending.

With inflationary pressure set to mount further over the coming months, even as wage growth stagnates, sales are likely to see continued weakness for some time to come.

As Andrew Sentance, senior economic adviser at PwC and former Bank of England (BoE) policymaker, noted:

‘We should see these retail sales figures as the start of a period of much weaker consumer spending growth - which will act as a drag on the overall progress of the UK economy over this year and next. This is the clearest indication yet that the expected slowdown in the UK economy has begun, and we should expect to see this confirmed in other economic data over the next few months.’

With political uncertainty generated by the general election also likely to limit domestic growth in the near term the outlook of the GBP USD exchange rate seems bearish.

If Theresa May continues to espouse a hard Brexit during campaigning this could sour the mood towards Sterling, given that markets have been betting that a larger Conservative majority would increase the chances of a softer divorce.

Confidence in the US Dollar faltered, meanwhile, as the odds of a June interest rate hike from the Federal Reserve slumped.

As the Philadelphia Fed manufacturing index slipped from 32.8 to 22 in April this added to worries over the health of the domestic economy, particularly as recent housing market data also proved disappointing.

Comments from the Trump administration have also put something of a dampener on rate hike speculation, with Trump reversing his campaign position in praise of low interest rates.

This all added to the impression that policymakers will opt to take a more gradual approach to monetary policy normalisation, limiting the upside potential of the ‘Greenback’.

Demand for the US Dollar could pick up ahead of the weekend, though, if April’s manufacturing and services PMIs show an uptick in economic activity.

However, if there are fresh signs of weakness within the US economy this could prompt another round of ‘Greenback’ selling this afternoon.

Market jitters could also put increased pressure on the GBP USD exchange rate in anticipation of the French presidential election, with any Euro weakness offering support to the US Dollar.

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TAGS: Dollar Pound Forecasts