Pound US Dollar exchange rate under pressure
News that Theresa May will only ask for a three month extension to the Brexit deadline saw the Pound Sterling to US Dollar (GBP/USD) exchange rate slump further.
Investors were disappointed by May’s decision not to seek a longer extension period, with the short timeframe appearing to raise the risk of the UK still leaving the EU without a deal in place.
Reports that European Commission President Jean-Claude Juncker wants any extension to finish before the EU parliamentary elections in May put additional pressure on GBP exchange rates, meanwhile.
However, with markets bracing ahead of the Federal Open Market Committee’s (FOMC) March policy announcement the US Dollar struggled to gain additional traction against its rival during trade on Wednesday.
Surprise UK Inflation Uptick Fails to Boost GBP/USD Exchange Rate
Confidence in the Pound was also dented by a surprise uptick in February’s UK consumer price index data, which showed a modest increase in inflationary pressure on the year.
As the headline CPI strengthened from 1.8% to 1.9%, climbing off its previous two-year low, the outlook for UK households diminished.
This uptick erodes some of the recent gains in wage growth, potentially limiting consumer spending in the months ahead.
While inflation is trending close to the Bank of England’s (BoE) 2% target this was not enough to shore up the GBP/USD exchange rate for the time being.
Neutral BoE Outlook to Limit Potential for GBP/USD Exchange Rate Rally
As markets expect the BoE to maintain a neutral stance at its March policy meeting the impact of Thursday’s rate announcement is likely to prove limited.
With policymakers facing limited options in the face of ongoing Brexit-based uncertainty interest rates look set to remain on hold in the near future.
However, if markets see signs that the BoE maintains a sense of optimism regarding the strength of the UK economy this could offer a boost to GBP exchange rates.
Any fresh Brexit developments could provoke further volatility for the Pound, meanwhile, as investors count the days until the Article 50 deadline.
US Dollar (USD) Exchange Rate Weakness Forecast on Federal Reserve Announcement
The mood towards the US Dollar could deteriorate further in the wake of the FOMC announcement, particularly if the latest set of dot plots prove underwhelming.
Evidence that the Federal Reserve is on course to leave interest rates on hold for some months to come would increase the downside pressure on USD exchange rates.
If the weakness of recent US data leads to an increased sense of caution over the economic outlook this may leave the US Dollar exposed to a fresh downtrend.
Unless the Philadelphia Fed business outlook index picks up on Thursday USD exchange rates could well remain on a weaker footing ahead of the weekend.