GBP/USD lost around half a cent last week due to a lack of appetite for higher interest rates at the Bank of England.
GBP/USD Falls From 8-Month High
Sterling slipped from an eight-month high midway through last week’s session as traders waited for a hawkish signal to drive the Pound through significant psychological resistance.
That hawkish signal didn’t materialise. News that US President Donald Trump had fired FBI director James Comey put pressure on the ‘Greenback’ due to concerns that the sacking may have been politically motivated. This put a little bit of pressure on the US Dollar but it wasn’t enough to give Sterling a big boost. Traders noted similarities between Trump’s decision and Nixon’s firing of Watergate special prosecutor Archibald Cox in 1973. On that occasion Nixon ended up resigning, if the same fate were to befall Trump then his big spending policies would be scrapped and the reflation trade, which has supported the Dollar since the US election, would be off.
BoE Pours Cold Water On Rate Hike Hopes
‘Cable’ slid by around 0.7% on Thursday as traders were disappointed by the Bank of England’s latest policy statement. The BoE left rates unchanged, with only one policymaker voting to hike borrowing costs. This undermined hawkish bets and negatively impacted Sterling. Traders were also perturbed by downward revisions to growth and wages, even though inflation expectations were upgraded. BoE Governor Mark Carney sounded fairly upbeat on the economy but hinted that interest rates would not rise until 2019 – and only then if the Brexit negotiations run smoothly.
Investors continued pushing GBP/USD lower on Friday until data showed that US inflation slowed from 2.4% to 2.2% in April. US sentiment was also hurt by a retail sales print of 0.4%, which underwhelmed forecasts of 0.6%.
Week Ahead
Market bets for Sterling to fall were reduced by the most in more than a year and the third most on record over the last week. This suggests that those expecting the Pound to trend lower due to Brexit uncertainty are starting to lose faith and could open the door to another GBP/USD rally.
Data this week is tipped to show that British inflation surged from 2.3% to a new three-and-a-half-year high of 2.6% last month, that UK unemployment remained at a multi-year low of 4.7% and that average earnings increased from 2.3% to 2.4%.
The sanguine results, if realised, could bolster Sterling. However, if inflation doesn’t rise quite so rapidly or if wages stall, the US Dollar could come out on top this week.