Sterling weakened by around two cents versus the US Dollar last week following the Federal Reserve’s decision to raise rates and employ a hawkish bias going forward.
Good Start for Sterling
The Pound rallied above 1.27 versus the ‘Greenback’ at the start of last week’s session as jittery traders reduced their bets of a strong hawkish message from the Fed and British inflation printed at a two-year high of 1.2%.
On Wednesday morning the UK jobless rate printed at a joint-11-year low of 4.8% and wage growth exceeded expectations with a score of 2.5% but it wasn’t enough to boost GBP/USD…
Hawkish Fed Dominates FX Markets
This is because during the evening the Federal Reserve raised interest rates from 0.50% to 0.75% and upped its outlook to suggest three further rate hikes in 2017 (rather than two previously). The hawkish Fed statement was seen as a bullish signal for the US Dollar, which soared higher across the board and registered gains of over a cent versus the Pound.
GBP/USD continued to soften on Thursday, sliding below 1.24 as investors reacted to a neutral message from the Bank of England. UK interest rates were left at 0.25%, as anticipated, but traders were a little disappointed with the BoE’s lack of intent to tighten. Policymakers noted that the Pound has recovered 6% from its October lows and cited this as reason not to forecast higher interest rates in 2017.
Week Ahead
Following the excitement of last week’s big policy announcements from the Fed and the BoE, GBP/USD is likely to trade with a little more stability this week.
There are not many ecostats that look capable of impacting the pair and subsequently we could see ‘Cable’ trade below 1.25 for most of the week as firms settle year-end positions rather than react to market-moving central bank announcements.
The long-term trend appears to support strength in the ‘Greenback’, but the Pound could fight back if surging British inflation expectations persuade the BoE to start explicitly considering a rise in UK interest rates.