Over the last seven days the Pound to US Dollar exchange rate has appreciated by around two cents to hit its highest level in almost two months. Upbeat UK retail sales and inflation data boosted Sterling, while concerns over President Donald Trump’s ability to pass legislation weighed on the ‘Greenback’.
UK Inflation Hits 3-Year High
GBP/USD struck a three-month high at the beginning of last week’s session as demand for Sterling increased following a three-year high UK CPI print of 2.3%. The inflation index, which jumped by more-than-anticipated from 1.8% to 2.3%, brought CPI above the Bank of England’s 2.0% target for the first time since late 2013.
Across the pond in the United States, non-voting Federal Reserve official Esther George said that there was potential for the removal of crisis-era accommodation. However, the ‘Greenback’ failed to benefit from the news, indicating that we will need to see strong signs that Fed officials are looking to raise rates more than the current projection of two further adjustments this year.
UK Retail Sales Impress
The Pound rallied again versus the US Dollar on Thursday following a 1.4% UK retail sales print for February, which smashed expectations of 0.4%. The robust figure took the annualised print up from 2.1% to 4.1% and helped stoke bets that the BoE could raise interest rates sooner-rather-than-later. The ‘Greenback’ stuttered as traders reacted with disappointed to a speech from Fed Chairwoman Janet Yellen which made no reference to monetary policy.
Demand for the US Dollar dropped markedly over the weekend on news that US President Donald Trump failed to garner enough support from within his ruling Republican party to pass a healthcare reform bill. The healthcare bill itself was unlikely to have a significant impact on monetary policy, however, the failure to gain support was seen as a warning sign that Trump’s ambitious spending and tax reform policies may also run into obstacles. The ‘Greenback’ and US shares have rallied strongly since Trump’s victory, on the hope of massive fiscal stimulus that could boost earnings, stock returns and inflation. However, we could see that trend reverse further over the coming days if traders continue to question Trump’s ability to follow through on his campaign pledges.
Week Ahead
This week sees a number of potentially important events in the US: consumer confidence, Q4 GDP and a speech from Fed Chairwoman Janet Yellen. The consumer index is tipped to soften slightly, while GDP is anticipated to inch up minimally. The main event is Yellen’s speech, which could boost USD if she employs hawkish rhetoric or dampen demand if she strikes a more cautious tone.
However, the main talking point of the week is likely to be UK Prime Minister Theresa May’s triggering of Article 50 on Wednesday. Largely priced into the Pound, the event may not actually have an instant impact on Sterling. However, we are likely to see fluctuations in the long-term in reaction to the ups and downs of the negotiation process.
GBP/USD is currently sitting at a near two-month high and is above longstanding psychological support. The US Dollar is threatened by a collapse of confidence in the US administration but ‘Cable’ is now around one cent above what many analysts consider ‘fair value’ for the pair. This suggests that there is potential for profit taking in GBP/USD.