The Pound to US Dollar exchange rate flirted with longstanding technical and psychological resistance last week, remaining close to two-month highs.
Reversal of ‘Trump Trade’ Weighs On US Dollar
‘Cable’ struck a two-month high at the start of last week’s session following US President Donald Trump’s failure to pass a healthcare reform bill. The aborted legislation raised concerns that Trump may struggle to follow through on his campaign pledges to inject massive fiscal stimulus and make substantial changes to the US tax system.
The ‘Greenback’ recovered some ground on Tuesday, however, when US consumer confidence jumped unexpectedly from 114.0 to a 16-year high of 125.6.
UK PM Theresa May Triggers Article 50
On Wednesday British Prime Minister Theresa May triggered Article 50 of the Lisbon Treaty to officially begin the UK’s two-year exit process from the European Union. Traders responded positively to the announcement because communications between European and UK leaders lacked the divisiveness of past correspondences, and therefore were seen to bode well for future trade negotiations. GBP/USD rallied by around a third of a cent on hopes of a smooth divorce process.
During the afternoon hawkish sentiments from Federal Reserve official Charles Evans, suggesting rates would likely rise twice more in 2017, gave the ‘Greenback’ a little bit of a boost.
GBP/USD Breaks Through Resistance At 1.25
The Pound drifted higher on Thursday as traders cheered news of the ‘Great Repeal Bill’, which will see the mammoth list of EU laws transposed into British law in order to foster continuity for businesses during the Brexit transition period.
GBP/USD strengthened by a further 75 pips on Friday as UK GDP data showed that the current account deficit halved from -£25.7 billion in Q3 to -£12.1 billion in Q4. This brought the deficit to GDP ratio down to 2.4% and boosted Sterling’s appeal because it was interpreted as a sign that the 15%-20% depreciation in 2016 was enough to make the UK economy competitive despite the uncertainty surrounding Brexit. ‘Cable’ broke through longstanding resistance at 1.25 on Friday, however, the Pound has since fallen back below that psychologically significant level.
Week Ahead
There are a number of high profile ecostats due for release this week – US durable goods, US private sector ISM indexes Fed minutes, US non-farm payrolls, UK services PMI, UK industrial production to name a few – however, provided we are not treated to any big surprises the data could play second fiddle to longer term trends.
Due to the lack of conviction in US President Donald Trump’s ability to push through his planned bullish policies, strong American figures are unlikely to materially alter the market consensus that the Fed is set to hike interest rates two more times in 2017.
At home, the big question is how will the UK economy cope now that Article 50 has been triggered. Provided there are no flare-ups between UK and EU ministers, and Twitter talk of a war with Spain over Gibraltar die down, the Pound could push back above resistance at 1.25 and head towards 1.27 over the next few weeks.