The GBP/USD exchange rate remained above psychological support for most of last week’s session as hopes of a rate rise from the Bank of England were stoked by sturdy data and a hawkish policymaker speech.
BoE Changes Tune
The Pound got off to a good start last week thanks to a hawkish message from BoE policymaker Kristin Forbes, who suggested that rates could start to rise imminently if inflation and GDP growth continued outpacing expectations. Later in the week Forbes announced that she was stepping down from her role but GBP/USD did not give back its gains, suggesting that traders are beginning to match her view on monetary policy despite the advice of Governor Mark Carney that the bank has no plans to start hiking in 2017.
Traders Tiring Of Trump
Throughout the week the Pound to US Dollar exchange rate managed to hold above technical and psychological support at 1.25. Some traders commented that markets were growing tired of waiting for US President Donald Trump to release more information regarding his campaign pledges to invest heavily in the US economy. Expectations of a gigantic fiscal spending drive – which was hoped would drive job creation, wage growth, inflation and Federal Reserve interest rates higher – have so far been disappointed and demand for the ‘Greenback’ has subsequently dipped following the initial ‘Trump bump’, which benefitted the ‘Greenback’.
Friday saw a raft of robust UK data releases, such as an unexpected dip in the deficit, an acceleration of GDP from 0.5% to 0.7% in January and much faster-than-expected manufacturing growth in December. However, GBP/USD failed to make any further gains because news of a large corporate merger between Britain’s Reckitt Benckiser and Mead Johnson Nutrition fuelled speculation that £13.2 billion would be transferred into US Dollars.
Week Ahead
Both the Pound and the US Dollar are set to benefit from spiking inflation reports this week, with UK CPI set to hit a two-year high of 1.9% and US inflation tipped to strike a four-year high of 2.4%. Both of these prints are liable to stoke rate hike bets, but with the Federal Reserve explicitly looking to hike rates three times in 2017 and the BoE currently planning to hold tight, it’s the US Dollar that is most likely to appreciate following the prints.