Pound US Dollar (GBP/USD) Exchange Rate Slips on Financial Gloom for British Households

Pound (GBP) Exchange Rates Tumble on Disappointing IHS Markit Household Finance Index

The Pound US Dollar (GBP/USD) exchange rate began the week on the back-foot, tumbling as markets responded to a gloomy IHS Markit report on UK household finances and last week’s run of optimism for the ‘Greenback’ on strong US data.

The data company’s household finance index – a monthly gauge for financial well-being – dropped to a seven-month low of 42.2, down from 42.9 in January.

This was largely driven by the ongoing financial squeeze on British households, with soaring inflation, lagging wage growth, and a devalued Pound hurting the spending power of consumers.

Tim Moore, Associate Director at IHS Markit shared his thoughts on the results:

‘The latest survey adds to evidence that UK households have seen an erosion of their financial well-being so far this year, with stubbornly high inflation the main factor placing pressure on consumer budgets’.

It should be noted, however, that the BoE has announced that it expects this squeeze to ease in 2018 as inflation cools and wage growth ticks higher (with Wednesday’s UK wage readings expected to attract a lot of attention).

US Dollar (USD) Exchange Rates Up on Consumer Optimism for Trump Economy

The US Dollar (USD) extended its rally on Monday, gaining on a thin-trading US President’s Day, as markets were forced to continue digesting last week’s run of upbeat ecostats.

Friday’s most notable ecostat was perhaps the University of Michigan consumer sentiment index, which unexpectedly increased in February from 95.7 to 99.9 - shrugging off any potential upset caused by the chaos in the stock-market and rising unabashed on optimism for the economic outlook of the US.

This was predominantly driven by a surge in consumer positivity on the back of rising incomes, strengthening employment and US President Donald Trump’s tax reform measures – factors combined that pushed the reading to its second-highest level since 2004.

Richard Curtin, Director of the University of Michigan Consumer Survey shared his thoughts on the readings, pointing to the influence of the tax cuts:

‘When the tax cut was first passed in late December, the details were largely unknown to the average consumer, and as we’ve moved through January, the details became clearer and employers started adjusting their withholding’.

GBP/USD Exchange Rate Forecast: UK Wage Growth and US FOMC Minutes in the Spotlight

The Pound US Dollar (GBP/USD) exchange rate could find room to rally this week, though it will largely be dependent on three factors; the UK’s wage growth readings - due Wednesday, demonstrable progress being made in the Brexit negotiation process, and the US FOMC minutes - also due on Wednesday.

UK average weekly earnings are currently expected to demonstrate growth of 2.5%, consistent with the previous period.

Some analysts have pointed to the UK’s tightening labour market, however, asserting that the record-low unemployment levels could finally be pushing wage earnings higher and higher.

If this is indeed the case then markets could increasingly price in a May rate hike from the Bank of England (BoE), with the recent higher-than-anticipated UK inflation readings already having stoked the fires.

Another pertinent release this week will be Wednesday’s US FOMC meeting minutes, with any fresh indication of hawkish sentiment liable to send USD bulls into a frenzy.

This is because analysts have been moving slowly towards the possibility of 4 rate hikes from the US Fed in 2018, rather than the previous forecast of 3.

Whilst the sentiment of the bank is largely already known, the minutes could reveal some fresh clues as to whether markets can expect a rate hike in March this year.