Having broken below 1.20 last week, the Pound to US Dollar exchange rate now appears to be approaching ‘fair value’ at 1.25, helped in part by President Donald Trump’s disappointing decision not to unveil concrete plans for economic policy.
GBP/USD Rebounds From 31-Year Lows
‘Cable’ slumped to its lowest level for 31-years – barring the flash crash of October 7 2016 – last week as hard Brexit concerns dampened demand for Sterling.
However, GBP/USD popped on Tuesday following UK Prime Minister Theresa May’s much-anticipated Brexit strategy speech. The PM confirmed that Britain would be coming out of the single market and customs union and hinted that if the EU does not offer a good deal, the UK would consider lowering corporation taxes to become a tax haven just off the shores of the continent.
It seems that three things led to the rebound in Sterling: 1) May’s plans took away a little bit of uncertainty and went some way to reassure markets that the government does in fact have a Brexit strategy, 2) market sentiment had been so heavily against the Pound in the run-up to the speech, which pushed GBP/USD lower and therefore created profit for ‘buy the rumour, sell the fact’ trades, and 3) the PM said that parliament would have the final say on the government’s Brexit deal, which assuaged fears that hardline Eurosceptic stances within the Tory party could lead to an unnecessarily damaging deal for the UK economy.
UK & US Data Prints Positively
Throughout the week UK and US data came in fairly robustly. British inflation struck a two-year high of 1.6% and unemployment held steady at an 11-year low of 4.8%. And across the Atlantic US industrial production increased 0.8% and CPI struck a two-year high of 2.1%.
The data would ordinarily have been enough to lift both respective currencies but political events – Brexit and Trump’s inauguration – took centre stage on this occasion.
President Donald Trump’s inauguration allowed GBP/USD to rally to a five-week high due to a lack of clarity on policy. Rather than lay out plans for his promised fiscal stimulus package, Trump’s administration spent much of the weekend arguing with the US media over how many people turned up to welcome the President into the White House. This deficit of policy information prompted a bout of ‘Greenback’ selling pressure, which could continue if Trump remains vague on his plans for the economy.
Week Ahead
Both Britain and the US are set to receive downgraded fourth quarter GDP results this week, but once again focus is likely to fall on developments related to Brexit and Trump.
The UK Supreme Court is due to announce on Tuesday how much say parliament will have in Brexit. If judges rule that devolved assemblies in Scotland and Northern Ireland will get a say then we could see another temporary surge in demand for Sterling. However, if the court rules in favour of the government then further GBP/USD weakness can be expected.
In America traders will be waiting for Trump to outline his spending plans. If he gives them sufficient information this should boost Federal Reserve rate hike bets and subsequently bolster the appeal of the ‘Greenback’. However, if the President fails to make his plans clear then the US Dollar could suffer.