'Lower-than-expected rate hikes by US Fed to ease pressure on GBP/USD'

Prathamesh Mallya

Since the inception of 2018 pound had been under severe pressure on account of jitters surrounding a hard Brexit as well continuous slack in the domestic economy hampering growth in UK. However, since the start of this year (2019), the pair of GBP/USD has appreciated nearly 2.6 percent. In line with its global counterpart, the GBP/INR has depreciated by around 5.3 percent during the same time frame.

In 2018, the strength in the US dollar was on account of optimistic data sets from the US. US Core inflation was consistently above the 2 percent target set by the US Fed. In addition, US was able to add an average of 186,000 jobs in 2018 as compared to 180,000 every month in the same period in 2017.

However, going forward, in 2019 the outlook looks gloomy for US dollar as the FOMC has cut their prediction for future rates hikes to only 2 hikes in 2019 from an earlier outlook of 3 rate hikes.

Prathamesh Mallya

Angel Commodities Broking

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Brexit weighed heavily on Pound

Sterling was hit by a storm named “Brexit” which they self-induced it in the year 2016. During that year, pound lost almost 20 percent of its value against most of its trading partners. 2018 was equally bad for sterling as it lost nearly 6 percent of its value against the US dollar.

The UK Parliament had rejected the Brexit deal in December 2018 which was secured by Theresa May from EU. The ministers felt that the deal highly favoured the EU and they wanted a better deal. Hence, with a big majority of 230 votes they rejected the deal.

As part of the deal only Northern Ireland could remain within the union after the day of Brexit but the UK ministers wanted a deal in which the entire UK could remain within the bloc till a proper path is formulated for Britain’s Exit.

Following the vote down on the Brexit deal by the UK ministers, PM May was then forced to face a no-confidence vote against her which she barely managed to survive. Meanwhile, after rejection of the Brexit deal EU leaders offered only clarifications but were not ready to make changes to the existing deal.

Outlook

Amid the uncertainty of a hard Brexit, the clock is running towards the Brexit Day (March 29, 2019) with no extension in sight. Till the deadline date there are no events in sight but Prime Minister Theresa May will likely travel to Brussels and other specific capitals to secure some kind of positive talks. Meanwhile, it will also be interesting to see if PM can convince enough members to support her, thus weakening the hand of hard-line Brexiteers.

However, the recent weakness in US dollar on account of lower than expected rate hikes by US Fed is likely to ease out some pressure from the GBP/USD pair.

Meanwhile, considering the broader impact of a hard Brexit if it happens if no substantial progress is made in the coming months then it is likely to drag the GBP/USD pair lower.

Hence, GBP/INR Spot (CMP: 92.67) is likely to move lower towards the 90 mark in a two month time frame.

The author is Chief Analyst – Non Agri Commodities and Currencies, Angel Commodities Broking.