Sterling rose by around a cent versus the US Dollar last week thanks to a positive reaction from the markets to Chancellor Phillip Hammond’s first budget statement.
May’s Transitional ‘Brexit’ Deal Boosts ‘Cable’
The Pound strengthened by around 150 pips versus the US Dollar last Monday in reaction to UK Prime Minister Theresa May’s comments on the potential for a transitional ‘Brexit’ trade deal that would provide business owners with stability if the ‘Brexit’ negotiations are not concluded within the official two-year divorce timeframe. The news bolstered demand for Sterling and brought ‘Cable’ to 1.25 – a level that many analysts believe is fair value for the pairing.
GBP/USD gave back its gains on Tuesday, with investors fearful that a ‘Brexit’ shaped black hole in the UK’s public finances would limit Chancellor Phillip Hammond’s ability to embark on fiscal stimulus to soothe the impact of the EU divorce. Indeed, although this year’s October deficit was the lowest since 2008, the government is very close to overshooting its 2016⁄17 year-end fiscal target.
Autumn Statement Calms Investors
Surprisingly, the Pound rallied versus the US Dollar following Hammond’s Autumn Statement. Although the Chancellor announced that there was a £122 billion gap in the UK’s public finances over the next five years, primarily linked to the decision to leave the EU, markets were cheered by plans to invest £23 billion over that time on infrastructure and innovation. GDP forecasts were revised lower but the Pound was also boosted by news that an additional £15 billion of UK Gilts will be sold next year – this news drove British government bond yields higher and enhanced demand for the UK currency.
In the US, durable goods orders smashed expectations of 1.7% with a robust score of 4.8%, however, with December Federal Reserve rate hike expectations anchored above 90%, the impact of the strong result was less pronounced than on past occasions.
Thin trading conditions, due to the Thanksgiving Holiday, allowed Sterling to rally further versus the ‘Greenback’ on Thursday and Friday.
However, GBP/USD has since given back those gains.
Week Ahead
The main event to look out for this week is Friday’s US non-farm payrolls report, which is tipped to show sturdy job creation of 175,000. At this stage it would take a horrendous report to alter the Fed’s plans to raise rates in December, but a strong report could still benefit the US Dollar by driving 2017 rate hike bets higher.
Other events to keep an eye on include the UK manufacturing PMI, the Bank of England’s financial stability report and the US Q3 GDP print.