The Pound to US Dollar exchange rate hit a seven-week high last week but gave back its gains when UK data disappointed and the Bank of England stuck to its guns on stimulus.
‘Cable’ Rallies to 7-Week High
Sterling surged to a seven-week high against the ‘Greenback’ at the start of last week’s session as contrasting service sector reports printed in favour of the UK currency. The British services PMI rose from 47.4 to 52.9 in August, marking the biggest monthly jump in the history of the index. The sanguine score helped assuage recession fears and bolstered Sterling’s appeal. In contrast, the US non-manufacturing ISM, which measures activity in the services industry, dipped unexpectedly to a six-year low figure of 51.4. The downbeat US print helped drive GBP/USD to a seven-week peak above 1.34.
But demand for the Pound softened on Wednesday when UK manufacturing production data for July came in at a yearly low of -0.9% and Bank of England Governor Mark Carney said that he was comfortable with the bank’s decision to loosen policy in August and hinted that further stimulus could be unleashed in the future.
Fed Stimulus Bets Boost US Dollar
Sterling continued to trend lower through the final days of the week as Federal Reserve policymakers talked up the possibility of a rate hike in the near future. Jeffrey Lacker said there was a strong claim for a September hike, while Esther George noted that the labour market was probably already at full strength and Eric Rosengren warned that the US economy could overheat if rates did not rise soon. GBP/USD sank below 1.33 in response to the hawkish sentiment, which pushed September rate hike bets up from 20% to 33%.
Week Ahead
The standout event on the docket this week is Thursday’s BoE policy announcement. However, the UK central bank is widely expected to leave policy unchanged, meaning any boost to Sterling following the announcement may be slender.
Tuesday’s UK CPI report is tipped to show that inflation rose from 0.6% to 0.7% in August but the result will probably slip under the radar because BoE Governor Mark Carney has previously that stated policymakers are planning to look through an expected rise in CPI (related to the post-‘Brexit’ weakening of the Pound) over the next 12 months. The unemployment rate is expected to come in at 4.9% but any positive or negative deviations could have a reciprocal effect on demand for Sterling.
The bottom line is that GBP/USD may struggle to post further gains this week if markets continue to fret over the possibility of a rate hike from the Federal Reserve later this month (September 21).