The Federal Reserve hiked interest rates 25 basis points last week but it was not enough to stop the Pound from bouncing higher versus the US Dollar.
GBP/USD Hits Two-Month Low On Second Scottish Referendum Talk
GBP/USD tumbled to a two-month low at the start of last week’s session following an announcement from Scottish First Minister Nicola Sturgeon that she would be requesting permission to a hold a second Scottish independence referendum. Scotland voted 62% – 38% in favour of remaining in the EU, and subsequently Sturgeon believes the Scots would now vote to break away from Britain if it meant they could retain EU membership.
On Wednesday the UK unemployment rate slid unexpectedly to a 41-year low of 4.7%. However, the upbeat labour market report was marred by a steeper-than-anticipated dip in wage growth, from 2.6% to 2.2%.
Later in the day the Federal Reserve raised interest rates 25 basis points, citing sturdy economic growth, a robust jobs market and rising inflation. The move was largely telegraphed by markets prior to its release and as such the hike had little impact on currency markets. In fact, the US Dollar actually depreciated after the announcement because the Fed’s neutral rhetoric did little to alter the longstanding belief that US interest rates will rise by a total of 75 basis points in 2017.
BoE Surprise Boosts Sterling
The Pound received a shot in the arm on Thursday when the Bank of England’s latest policy statement revealed that one policymaker, Kristin Forbes, voted to raise interest rates in March. The BoE voted 8-1 against raising rates but other policymakers hinted that the case was growing for higher borrowing costs to combat rapidly rising price pressures.
The unexpected hawkish shift in BoE policy outlook has helped the Pound to US Dollar exchange rate rally by over two cents (moving from a two-month low to a three-week high) since last Tuesday.
Week Ahead
The US Dollar suffered a little bit at the start of this week’s session due to events at the G-20 meeting in Germany, which suggested US Prime Minister Donald Trump is likely to follow through with pledges to enact protectionist US trade policies. Sterling, meanwhile, dipped on news that UK Prime Minister Theresa May intends to trigger Article 50 on 29 March.
The main data to look out for this week is the UK inflation report. British CPI is tipped to rise from 1.8% to 2.1%, which could easily stoke BoE rate hike bets. At the start of last week’s session traders gave it a 25% chance that the UK central bank would tighten in November, this has risen to 44% in light of last week’s hawkish BoE policy statement.
Other ecostats to keep an eye on include the UK retail sales index and the US durable goods orders print.