Sterling tumbled from a three-week high versus the US Dollar last week in reaction to a rise in 2016 Federal Reserve rate hike bets.
GBP/USD Rallies to 3-Week High
The Pound leapt higher by around 80 pips last Monday to 1.31 as traders bought back into the UK currency to conclude short Sterling positions. It seems that upbeat data prints pertaining to the UK retail sector and labour market following the ‘Brexit’ vote prompted some investors to lock-in profit, rather than wait for further GBP/USD losses.
This trend of short-covering continued on Tuesday when ‘Cable’ rallied by a further 50 pips. GBP/USD ticked higher again on Wednesday to strike a three-week high north of 1.32. It is possible that demand for the Pound was boosted on Wednesday by news that Scottish North Sea oil revenue plunged 97% last year, which was seen to reduce the prospect of another Scottish independence referendum. Remember: now faced with the uncertainty of ‘Brexit’, stability is key for investor confidence.
Fed Speech Takes Centre Stage
However, Sterling’s short-covering rally came to an end on Thursday as Janet Yellen’s key Jackson Hole Symposium speech came into sharper relief.
During the Federal Reserve Chairwoman’s address, Yellen confirmed that recent positive developments in the labour market and inflation outlooks had ‘strengthened’ the case for tighter monetary policy. However, Yellen did not give any clues as to when rate may rise. Fed Vice Chair Stanley Fischer then indicated that Yellen’s remarks were consistent with a rate rise by the end of the year.
Following the Jackson Hole Symposium speeches, September Fed rate hike bets for rose from 18% to 30% and December tightening bets jumped from 44% to 60%. The subsequent shift in demand for the ‘Greenback’ brought the Pound to US Dollar exchange rate lower by around 150 pips over the Bank Holiday weekend.
Will the GBP/USD Downtrend Resume?
Following last week’s hawkish Fed rhetoric, traders are now beginning to believe that December will be the month the US central bank hikes rates. The Fed’s hawkish path runs concurrent with the consensus that the Bank of England is going to unleash further stimulus over the next 6-18 months and therefore there is potential for further Sterling losses against the US Dollar.
This week is expected to see both UK construction and UK manufacturing PMI prints remain in the contractionary territory, while US non-farm payrolls are predicted to rise at a sturdy pace of 180,000. The outlook for GBP/USD does not look great, but investors may wait for further signs of BoE stimulus to take the Pound below key psychological resistance at 1.30.