The Pound to US Dollar exchange rate rose then fell last week as comments from the US government hurt the ‘Greenback’ and a dovish Bank of England (BoE) statement weighed on Sterling.
Trump Advisor Weakens US Dollar
‘Cable’ surged through psychological resistance at 1.25 at the start of last week’s session when US President Donald Trump’s top trade advisor accused Germany of using a ‘grossly undervalued’ currency to gain a competitive edge over trade partners in Europe and North America. The incendiary comments were met with derision from German policymakers, who maintained that it is the independent European Central Bank that sets monetary policy, not the German Bundesbank.
The ‘Greenback’ tanked following the remarks, however, because analysts interpreted the accusation as a sign that Trump may target exchange rates as part of his strategy for increasing US trade. The US President had previously sparked fears of this ilk by commenting that the US Dollar was ‘too strong’ against the Chinese Yuan.
GBP/USD rallied towards 1.27 on Wednesday, helped along the way by a robust manufacturing PMI score of 55.9.
BoE Weighs On Sterling
Although the Federal Reserve also struck a neutral tone last week, reducing bets of further interest rate hikes in the immediate future, demand for the Pound collapsed on Thursday following a disappointing policy statement from the BoE.
Threadneedle Street upped its 2017 GDP forecasts from 1.4% to 2.0% and predicted that inflation would peak at 2.8% in 2018. However, the rhetoric employed by Governor Mark Carney suggested that the bank was relatively relaxed about the inflationary outlook and was not planning to start hiking rates anytime soon. The decision to adjust the bank’s unemployment equilibrium rate from 5% to 4%-4.75% signalled to investors that interest rates would probably remain at rock-bottom levels until joblessness decreases significantly further and this drove GBP/USD lower.
‘Cable’ slid further towards 1.24 on Friday following an unexpectedly sharp deceleration in the UK’s dominant service sector, from 56.2 to 54.5. Later on in the day US non-farm payrolls smashed expectations of 180,000 with a score of 227,000. But sentiment towards the ‘Greenback’ was neutralized by a dip in wage growth from 2.8% to 2.5%.
Week Ahead
There are not many important economic releases on the calendar this week, which means GBP/USD trading patterns are liable to follow the latest twists and turns in the Brexit and Trump sagas.
If UK lawmakers are given more input in Britain’s post-Brexit trading relationship with the EU then Sterling could mount a rally.
Meanwhile, the US Dollar could benefit from further clarity on Trump’s plans to boost the US economy through infrastructure spending.