US Dollar (USD) Exchange Rate Outlook – Is the Tide Turning for the ‘Buck’?

by Alexander Beard, on Apr 23, 2015 11:29:49 AM

For the first three months of 2015 the US Dollar enjoyed a bullish relationship with the majority of its currency counterparts as investors priced in the Federal Reserve increasing interest rates in June.

The US Dollar notably outperformed both the British Pound and Euro as UK election concerns reduced demand for Sterling while the common currency softened in reaction to the ongoing negotiations between Greece and its creditors.

However, the tide may be turning for the world’s premier reserve currency.

Over the last couple of weeks the Pound Sterling to US Dollar (GBP/USD) exchange rate has managed to claw back much of its recent losses, rallying from a low of 1.4579 to achieve highs of 1.5010.

As 1.50 is a key technical support level for ‘Cable’, this shift could mark a new uptrend in the Pound/US Dollar pairing.

Although the Pound is likely to remain under strain in the build up to the ballot in May, the UK has been producing solid domestic data – supporting the case for a sooner-rather-than-later interest rate hike from the Bank of England (BoE) and helping Sterling advance.

The latest set of UK employment data was particularly encouraging. In the three months through February the UK was shown to have added 248,000 positions – over 70,000 more than anticipated.

The UK unemployment rate therefore fell to 5.6% - its lowest level since 2008.

The BoE has intimated that the UK labour market and inflation outlook are the areas it’s focusing on when deciding its approach to fiscal policy. The UK managed to avoid entering deflation territory in March, and the jobs data couldn’t really be more encouraging.

Some investors are now anticipating an adjustment to borrowing costs before the close of this year, and this speculation may prevent the Pound from losing its new-found strength against the US Dollar.

Conversely, the latest batch of US data, from advance retail sales to industrial production figures, has fallen well short of forecasts.

While many of the sub-par results have been blamed on unseasonable weather, industry experts are now questioning whether the Fed will be prepared to adjust interest rates in June. Although some anticipate a revision being delayed until September, others are beginning to doubt whether rates will actually change in 2015 at all.

If US data continues to fall flat, the GBP/USD exchange rate could push higher still in the weeks ahead.

The Euro, meanwhile, may continue to struggle against its US peer unless Greece reaches an agreement with its creditors in the very near future.

In the week ahead the US reports with the most potential to initiate US Dollar movement include the nation’s Markit Manufacturing PMI, Initial Jobless Claims figures, New Home Sales data and the Durable Goods Orders ecostat. Any results which come in lower than anticipated will weigh on the ‘Buck’.

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