The Pound to US Dollar exchange rate fluctuated last week as the Federal Reserve raised interest rates but did not signal additional rate hikes in 2018.
Sterling Gains after UK Inflation Hits Highest Level in Almost Six Years
Sterling ticked a little higher at the start of last week’s session following news that UK inflation rose unexpectedly from 3.0% to a near-six-year high of 3.1% in November.
This was followed by an improvement in average earnings. But at 2.5%, pay growth data still pointed to negative real wage growth (inflation outstripping wages) and this prevented GBP/USD mounting a serious rally.
US Dollar Exchange Rates Soften Following Federal Reserve Rate Hike
The Federal Reserve raised rates by 25 basis points as expected last Wednesday. The announcement had little positive impact on the US Dollar because traders had already priced the rate rise into the currency.
However, demand for the ‘Greenback’ softened following the Fed statement, which featured a forecast for three further rate rises in 2018 – no upgrade on previous projections.
This disappointed market hopes of more aggressive tightening in the New Year due to robust domestic growth and the potential for President Donald Trump’s tax bill to boost price pressures.
One explanation for the neutral statement could be that Fed Chair Janet Yellen is due to leave the bank in March, with Jerome Powell set to take over the ship.
Some analysts believe that Yellen may have refrained from any signaling any significant shifts in policy outlook that she would not be around to implement. This theory suggests that we could see the US Dollar start to strengthen in the run-up to Powell’s inauguration.
Brexit Progress and BoE Fail to Boost Pound US Dollar Exchange Rate
At last week’s policy announcement the Bank of England (BoE) left rates on hold and noted that recent progress in the Brexit talks would ‘reduce the likelihood of a disorderly Brexit’.
However, BoE Governor Mark Carney also suggested that the UK economic outlook had not significantly improved since the November Inflation Report.
By playing down the Brexit progress, Carney appeared to stunt the appeal of the Pound.
And on Friday Sterling suffered as European Commissioner Jean-Claude Juncker also poured cold water over burgeoning Brexit optimism.
The EU formally confirmed that Britain had made ‘sufficient progress’ to move onto future trade talks, but Juncker warned that the second round of Brexit talks would be ‘considerably harder than the first – and the first was very hard’.
GBP/USD Exchange Rate Forecast: Narrow Trading Ahead as Data Calendar Slows for Christmas?
There is little new data due for release this week, meaning that GBP/USD could remain capped by the two-month highs hit at the beginning of December.
An expected US PCE inflation print of 1.5% is unlikely to boost the ‘Greenback’, as the Fed aims for inflation of around 2.0%.
Data Affecting This Week’s GBP/USD Forecast
20th December GBP Carney Speaks at Parliament Hearing in London
21st December USD Gross Domestic Product Annualized (QoQ) (3Q T)
21st December GBP PSNB ex Banking Groups (NOV)
22nd December GBP Gross Domestic Product (YoY) (3Q F)
22nd December USD Durable Goods Orders (NOV P)
22nd December USD PCE Core (YoY) (NOV)