Sterling slid by around a cent versus the US Dollar last week, falling from a two-month high ahead of this week’s anticipated rate hike from the Federal Reserve.
‘Cable’ Starts Above 1.27
GBP/USD held steady above 1.27 at the start of last week’s session as both the UK and the US enjoyed sturdy service sector results. UK services printed at a 10-month high of 55.2, while the American equivalent came in at 57.2.
The Pound performed well again on Tuesday morning, thanks to confirmation from UK Chancellor Phillip Hammond that the British government was considering paying into the EU budget in order to maintain access to the single market. However, GBP/USD ran into significant resistance during the afternoon and the pair swiftly tumbled lower by around -100 pips.
March 2017 Brexit Bets Weigh
Demand for the UK currency softened again on Wednesday when parliament voted in favour of Prime Minister Theresa May’s timeline for invoking Brexit in March 2017. The Pound also suffered from a -1.3% contraction in industrial production, which was the worst score since 2012.
‘Cable’ tumbled to a one-week low on Thursday as investors continued digesting the implications of a near-term Brexit, while hawkish Federal Reserve bets supported the ‘Greenback’.
Although US consumer confidence soared in December, rising from 93.8 to 98.0 on Friday, GBP/USD was able to claw back some ground over the weekend due to news that two fresh Brexit legal challenges were being launched. The challenges hope to prevent the government from leaving the single market after exiting the European Union.
Week Ahead
Although UK inflation and unemployment data is due to print positively this week, and the Bank of England is set to leave policy on hold with an increasingly less dovish outlook, the main event is clearly the Federal Reserve’s interest rate announcement.
Markets are 97% sure that the Fed will raise rates from 0.50% to 0.75% on Wednesday evening. This much is almost entirely priced into the US Dollar already. This means traders will be looking to the Fed’s projections for clues on future policy. The market consensus is for two further rate hikes in 2017, meaning that we could see the ‘Greenback’ rally if two or more rises appear imminent or fall if policymakers take a wait-and-see approach.
Having predicted four hikes in 2016 at the start of the year and only potentially delivering one, there is a good chance that the Fed will look to conserve its credibility by not sticking its neck out so far this time around. If Fed Chairwoman Janet Yellen’s statement underwhelms hawkish market bets then we could actually see Sterling make ground versus the US Dollar following the announcement.