The GBP/USD exchange rate slid by around -150 pips to strike a seven-week low last week as markets fully priced in the prospect of a Federal Reserve rate hike taking place on Wednesday.
UK Growth Prospects Hurt By Weak Consumer Trends
With March Fed rate hike bets surging to 86% at the start of last week’s session, the ‘Greenback’ was firmly in the driving seat. And the Pound’s woes intensified when British Retail Consortium (BRC) data showed that retail sales slumped -0.2% in the three months to February, marking the first dip in non-food sales for over five years. British growth has remained remarkably resilient since the Brexit referendum last June, largely thanks to the voracious appetite of UK consumers. However, British GDP could slow significantly if the Pound’s 2016 depreciation continues to drive domestic prices higher and leads to a moderation in consumer spending trends.
Sturdy US Labour Figures Boost ‘Greenback’
Sterling gained a little bit of support on Wednesday from Chancellor Philip Hammond’s Spring Budget, which featured upgrades to 2017 UK GDP growth from 1.4% to 2.0%, and news of mild spending increases over the next year. However, GBP/USD skidded to fresh seven-week lows in response to a 298,000 ADP employment print, which smashed forecasts of 187,000.
Friday’s session saw the highly anticipated US non-farm payrolls report come in above consensus, with a score of 235,000 compared to calls of 200,000. The data was seen to cement expectations that the Fed will hike rates this week, but GBP/USD remained fairly flat due to the fact that investors had heavily priced in the possibility of higher rates prior to the NFP report.
Week Ahead
The most high profile economic release of the week is the Fed’s policy decision on Wednesday, which is very likely to see the US central bank raise rates by 25 basis points. The market is unlikely to move on the decision, unless US policymakers show a greater willingness to hike rates over the course of the year. The bank currently envisions a total of three rate rises in 2017.
The Bank of England is also due to announce monetary policy for March this week but no changes are expected. Governor Mark Carney appears reluctant to make any hawkish statements, despite the onset of rising price pressures, meaning Sterling has more chance of depreciating than appreciating following the central bank statement.
With Scottish First Lady Nicola Sturgeon announcing plans for a second Scottish independence referendum already this week and rumours circulating that UK Prime Minister Theresa May could trigger Article 50 before the weekend, the political landscape also appears to favour US Dollar strength against the Pound.