The Pound to US Dollar exchange rate strengthened by around three cents last week in response to the Bank of England’s announcement that interest rates would remain on hold at 0.50% in July.
UK Political Stability Improves
Sterling appreciated slightly against the ‘Greenback’ at the start of last week’s session as reports surfaced suggesting that Theresa May would become the next British Prime Minister. It emerged that leadership candidate Andrea Leadsom had pulled out of the race, which boosted UK sentiment because it nullified the need for a nine-week long Tory leadership contest.
The Pound continued to tick higher on Tuesday as the Theresa May rally persisted to lift UK sentiment and increase political stability. Having started the week close to 1.29, GBP/USD reached 1.33 by Wednesday morning.
But demand for the Pound softened on Wednesday afternoon as investors positioned themselves ahead of the Bank of England’s interest rate decision, which most investors expected to result in a reduction in borrowing costs.
BoE Stimulus in Focus
However, traders, who had forecast an 80% chance of a cut were wrong-footed by the BoE’s decision to leave rates on hold. The minutes revealed that policymakers expected to provide additional stimulus in August but that it was too early to ascertain the impact that the ‘Brexit’ vote has had on the UK economy. GBP/USD jumped to 1.34 in reaction to the announcement.
Sterling was forced to give back some of its gains on Sunday, sliding back to 1.32 versus the US Dollar, as BoE policymaker Martin Weale hinted at further quantitative easing as well as a rate cut in August. The ‘Greenback’ also drew support from robust domestic data showing that retail sales, industrial production and consumer prices all improved in June.
Week Ahead
It will be interesting to see whether GBP/USD manages to remain above psychological support at 1.30 this week.
A predicted rise in UK consumer prices from 0.3% to 0.4% and an expected 2.3% uptick in British wage growth could prop-up demand for the Pound.
However, UK retail sales are anticipated to have decelerated from 5.7% to 4.8% in June and manufacturing output is likely to have slipped into contraction, with predictions suggesting the PMI will plunge from 52.1 to 47.5.
There is little US data on the calendar but the Dollar will continue to benefit from its position as the world’s premier reserve currency, meaning that GBP/USD could struggle to post any meaningful new gains.