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Sterling is currently around a cent weaker against the US Dollar than it was this time last week due to rising bets of tighter monetary policy in the US.
No ‘Brexit’ Plan Memo Hurts Pound
Sterling tumbled against the US Dollar last Tuesday as a leaked memo, insisting that UK PM Theresa May had no overall ‘Brexit’ strategy, weighed on demand for the Pound. The memo, which appeared in The Times but was not verified by Downing Street, claimed that an additional 30,000 civil servants were required to work through the divorce process and suggested that the government would not be ready to trigger Article 50 of the Lisbon Treaty until at least six months after the proposed date of March 2017.
Across the pond in the US, demand for the ‘Greenback’ was boosted by an acceleration of retail sales from 0.5% to 0.8%.
‘Cable’ remained fairly flat on Wednesday, thanks to a surprise 11-year low unemployment rate print of 4.8%. However, Sterling could make no gains because traders continued to bet on an imminent 25-basis point interest rate hike in the US.
UK Retail Sales Hit 14-Year High
Thursday saw British retail sales accelerate at the fastest pace since 2002, with a bumper 7.6% annual expansion in October. The upbeat report supported the Pound but the US Dollar maintained strong demand due to a hawkish statement from Federal Reserve Chairwoman Janet Yellen, which boosted short-term rate hike bets to suggest a 95% chance of a rate rise next month.
Week Ahead
In addition to the huge level of market bets for higher rates in December, the longer-term market predictions suggest interest rates will rise swiftly over the next few years in the US. This is because President-elect Donald Trump’s plans to borrow huge amounts of money to spend on infrastructure are likely to send inflation expectations through the roof and therefore prompt a quick response (in the form of tighter policy) from the Fed.
This hawkish outlook means it will be difficult for Sterling to make further gains against the ‘Greenback’. Indeed, many analysts predict that GBP/USD will remain capped at 1.25 for the remainder of the year.
The main event to look out for this week is UK Chancellor Phillip Hammond’s Autumn Budget Statement on Wednesday. The Chancellor is likely to soften some spending cuts and tax increases. However, any positive impact on the Pound could be muted due to the anticipated £100 billion budget black hole over the next five years as a consequence of ‘Brexit’. The poor state of Britain’s public finances mean that the Conservative minister is unlikely to announce any significant fiscal stimulus measures.
The Pound was boosted on Monday afternoon by remarks from UK PM Theresa May suggesting she would be seeking a transitional ‘Brexit’ deal to provide UK businesses with an added layer of stability. But the potential for further GBP/USD gains looks small this week, considering the hawkish outlook at the Federal Reserve.