The Pound to US Dollar exchange rate struck a monthly high last week as investors reacted to a dovish policy statement from the Federal Reserve.
Sterling began the week on the wrong foot as ‘Brexit’ fears intensified following a poll published in The Daily Telegraph giving the ‘LEAVE’ camp a two-point lead in the build-up to June’s referendum on Britain’s EU membership.
GBP/USD weakened again on Wednesday when the latest UK budget saw Chancellor George Osborne reduce Britain’s 2016 GDP forecast from 2.4% to 2.0%. This brought Sterling below 1.41, marking a three-cent depreciation in the first few days of the week.
However, demand for the Pound shot up on Wednesday evening when the Federal Reserve opted to leave rates on hold and slashed its dot plot projections. The dot plot graph indicates an average prediction from policymakers on how interest rates will move going forward. In December, following the first rate hike in years, the graph indicated that there would 100 basis points worth of hikes in 2016. March’s dot plot graph signalled that rates would only rise by 50 basis points this year.
BoE Unanimous in Holding Rates
‘Cable’ breached psychological resistance at 1.45 on Thursday when the Bank of England minutes revealed that nobody in the nine-person monetary policy committee had voted to reduce, or raise, interest rates in March. This was taken as a hawkish outcome because some analysts had anticipated a couple of votes to ease policy further.
Sterling was unable to hold onto these gains through the final section of the week’s session though because markets were forced to react to a shock resignation from work and pensions secretary Iain Duncan Smith. The news softened demand for Sterling because it was seen to undermine political stability ahead of the EU vote in June.
Week Ahead
The Pound to US Dollar exchange rate could easily trade between 1.42 and 1.44 over the next few days as investors pause for thought following last week’s slew of significant announcements.
UK data is anticipated to see consumer prices inch up from 0.3% to 0.4% and retail sales slide -1.0%. Meanwhile, US durable goods are tipped to shrink -2.5% and US fourth quarter GDP is expected to be confirmed at 1.0%.
Heads Up
Summary of major upcoming data releases that we think may move the market.