Pound Dollar Exchange Rate Loses 6 Week High as GBP Squanders Strength

US dollar outlook

The British pound (GBP) squandered a six-week high against the greenback ahead of the weekend.

The pound to dollar exchange rate (GBP/USD) was seen lower by a quarter of a percent at 1.5375 as markets entered their final session of the week bringing to an end an impressive recovery rally.

The US dollar was seen benefitting from risk-off sentiment owing to nerves over Greece.

Meanwhile, official data out of the U.K. showed consumers cut back on spending in January.

British retail sales fell 0.3 percent in January, a slightly bigger decline than expected.

The near-term outlook for GBP is meanwhile dominated by the release of revised U.K. growth figures for the fourth quarter on Feb. 26.
“Growth is seen going an unrevised 0.5 percent for last quarter. Any surprise upward revision to growth could see the pound rise to fresh highs for the year around $1.56,” says Joe Manimbo, analyst at Western Union.

Manimbo says GBP buyers should consider taking advantage of the dollar’s slim gain on the year against the pound which has receded markedly in recent weeks.

Looking at the dollar we note the USD has settled into a confined range as mixed data and dovish minutes from the Fed’s previous meeting have tempered expectations for a Fed rate hike anytime soon.

“But the market seems inclined to take the cautious Fed minutes with a grain of salt since they didn’t capture recent jobs data that have shown more signs of strength,” says Manimbo.

January hiring proved stronger than expected while this week’s jobless claims improved more than forecast and dipped comfortably below 300,000, auguring well for the next monthly employment report.

Consequently, a midyear move by the Fed is still seen plausible, underpinning the greenback.

Turning to the outlook, Western Union tell us Federal Reserve policy will be front and centre for markets next week when chair Janet Yellen delivers her twice yearly economic testimony on Capitol Hill on Tuesday and Wednesday.

“What the tone of Ms. Yellen’s remarks suggests about the arrival of a rate hike will be of critical importance for the dollar,” says Manimbo in a note to clients.

FOMC Minutes Keep Dollar in Check

The USD folded easily, along with US yields, at the sight of the dovish headlines surrounding the release of the January FOMC minutes earlier in the week. 

"The headlines certainly read a little softer than the market had expected—perhaps given that expectations have been conditioned by the stronger US NFP report released earlier this month and after the last Fed policy meeting took place - but the reaction to the USD reflects our concern that the USD looks fully priced in the current environment, with a lot of good news already factored from the USD’s perspective—and bad news priced in to the EUR to the extent that the bid to broker a deal between Greece and the EU etc. is hardly having any impact," says Shaun Osborne at TD Securities.

TD remain bullish on the USD but think it may struggle to progress materially until we get harder evidence of the Fed moving towards rate lift off or more bearish news - negative data, Greek developments or hints of further easing measures to come from central banks elsewhere.

Equally though, we doubt the EUR will progress to any significant extent in the event of an 11th hour deal on Greece.

"We still rather see 1.1450/00 as the top of the range for the moment," says Osborne commenting on the outlook facing the euro dollar rate.