The Pound to US Dollar exchange rate inched higher last week thanks to a surprise three votes from Bank of England policymakers for higher interest rates in June.
Political Uncertainty Drags Sterling Lower
Having depreciated by around two cents following the general election, which left Britain with a hung parliament, GBP/USD tumbled by a further 100 pips last Monday on news that Theresa May’s talks with the Democratic Unionist Party (DUP) were taking longer than initially expected. The delay in agreeing a ‘confidence and supply’ agreement led to the postponement of the Queen’s Speech and this weighed on GBP/USD.
However, Sterling was able to recover on Tuesday when British inflation printed at a four-year high of 2.9%. The surge in consumer prices brought CPI above the BoE’s projected peak for 2017 and added weight to the argument for higher interest rates. But data on Wednesday was less bullish, with average earnings growth slowing to 1.7%, which took real wage growth (wages minus inflation) down to its lowest level for three years.
Fed Raises Interest Rates
US data on Wednesday saw retail sales decline -0.3% unexpectedly and inflation cool from 2.2% to 1.9%. The underwhelming figures had a temporary negative impact on demand for the ‘Greenback’, however, the US Dollar surged during the evening when the Federal Reserve raised interest rates 25 basis points and signalled that additional tightening was likely in the second half of the year.
BoE Surprisingly Hawkish
‘Cable’ bounced higher on Thursday when three BoE policymakers voted for higher rates. Although the hawkish officials were outvoted (5-3), and are likely to be outvoted for the foreseeable future, the shift in rhetoric boosted the Pound as it showed that the central bank was willing to combat further depreciation of the domestic currency.
Week Ahead
Britain’s Brexit negotiations with the EU begun this week and the difficult talks are liable to impact movements in GBP/USD. If UK Brexit minister David Davis and chief EU negotiator Michel Barnier get off to an amicable start the Pound could benefit. But if tensions flare there is potential for additional Sterling losses.
It remains to be seen how much of an impact the failed Tory election campaign will have on Britain’s Brexit strategy, but markets are clear that any shift towards maintaining access to the single market and customs union would be seen as a positive signal for Sterling and the UK economy.
Also on the agenda is the rescheduled Queen’s Speech, which could prompt currency fluctuation if it features any policy surprises that could impact or boost domestic growth prospects.