The Pound to US Dollar exchange rate slumped to a series of new eight-month lows last week as worries of soft UK inflation and a potential ‘Brexit’ weighed on demand for Sterling.
With the Federal Reserve already upping rates in December and looking to hike on a further four occasions this year it is not difficult to see why the ‘Greenback’ is currently outperforming the Pound.
Weak inflation prospects, exacerbated by the continued slide in oil prices, are helping to keep British wages down, which means that policymakers at the Bank of England are not seeing the expected tightening in labour market conditions that they would like to see before raising interest rates.
Additionally, Sterling is ceding support due to enhanced fears that economic activity could slow in the buildup to a potential in/out European Union referendum. If Britons do vote to leave the EU the short term consequences for the domestic economy could be even worse as business investment stalls and some companies relocate to European hubs.
GBP/USD is currently sitting a long way from the key psychological 1.50 mark that acted as support for much of 2015. As investors continue to price-in additional rate hikes from the Fed we could see ‘Cable’ slide from the current 1.47 to five-year lows below 1.46.
Data this week is anticipated to show that British service sector output remained strong at 55.6 but demand for the ‘Greenback’ could surpass that for Sterling if the latest FOMC minutes report reveals that there is a broad consensus for further monetary tightening in the New Year. GBP/USD is also liable to suffer if December’s non-farm payroll report prints in the region of 200,000, as expected.
Heads Up
Summary of major upcoming data releases that we think may move the market.