Foreign Currency Market Update – GBP / USD Update
Sterling rose by almost two cents against the US Dollar last week, reaching a new monthly high in the process, as Bank of England rhetoric favoured a slightly earlier-than-anticipated rise in UK interest rates.
GBP/USD grappled with technical resistance at 1.5240 at the beginning of last week’s session but Sterling rose above that level on Tuesday when British data beat expectations. The latest UK manufacturing report showed that production increased by 2.4% last year, beating forecasts of 2.0%.
Wednesday was largely uneventful for Sterling and the ‘Greenback’ as traders geared up for Thursday’s key statement from the Bank of England.
And true to form, markets reacted vociferously to the BoE announcement. Sterling managed to appreciate by almost two cents to a new monthly high of 1.5400 in reaction to Governor Mark Carney’s remarks on the future path of interest rates. Mr Carney said that lower inflation would increase Britons’ spending power and therefore provide a positive contribution to the UK economy. The Governor predicted that GDP would improve by 2.9% in each of the next two years and estimated that inflation would overshoot the bank’s 2.0% target if rates were not raised. This largely positive statement caused traders to bring forward their BoE rate hike projections by around six months, to suggest that rates would begin to rise at the start of 2016.
GBP/USD also benefitted from soft US ecostats towards the tail end of last week’s session, with US retail sales contracting -0.9% and US consumer confidence cooling unexpectedly from 98.1 to 93.6.
Last week’s near-two-cent appreciation in Sterling marked the first time since June last year that the Pound has registered three consecutive weeks of gains against the US Dollar. This suggests that the intense downward trend that brought ‘Cable’ lower by around 10 cents in six months is finally over, and could point towards further Sterling rallies.
However, with markets primed for a Federal Reserve rate hike in September, a full six months earlier than the BoE, there is potential for the ‘Greenback’ to strengthen if UK indicators disappoint.
British inflation is set to fall to a new 25-year low of 0.4% on Tuesday but the Pound could overcome this troubling statistic if investors remain calm; Governor Carney has predicted that inflation will fall to 0.0% later on in the year but has stressed that this will not lead to lower CPI rates in the long term.
UK unemployment is set to remain at a six-year low of 5.8% on Wednesday and wages are expected to tick along nicely at 1.7% so neither of these two figures should have too much of a bearing on the GBP/USD rate. Neither should the BoE minutes report because it is unlikely to provide markets with any information that was not released during last week’s quarterly inflation statement.
Therefore it looks likely that the Pound to US Dollar exchange rate will trade close to 1.5300 for most of this week’s session.
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