The ‘Greenback’ received a bit of a boost at the start of last week’s session thanks to hawkish remarks from New York Federal Reserve President William Dudley suggesting that US inflation and wages were likely to rebound over the coming months. The upbeat remarks appeared to suggest that the US central bank intends to stick to its plan of normalising monetary policy despite recent setbacks in domestic data.
Dovish Carney Slams Sterling
GBP/USD crashed to a two-month low last Tuesday when Bank of England Governor Mark Carney cooled talk of an interest rate hike taking place anytime soon. The Governor said that uncertainty surrounding Brexit, slowing consumer spending trends, soft inflation and anaemic wage growth meant that the time was not right for higher rates. The remarks sent ‘Cable’ lower by around a cent as BoE rate hike bets were cut.
Mixed Signals Continue From BoE
However, Sterling caught a bid on Wednesday as BoE chief economist Andy Haldane weighed in with comments suggesting that he would be voting for higher rates later in the year. Haldane was previously considered one of the most dovish bank officials, so his shift into hawkish territory was treated as a serious move. Markets now reckon there is a 50% chance of a BoE rate hike before the end of the year and GBP/USD rallied by around 80 pips in response to the speech.
Following the recent BoE vote (which saw three policymakers vote for higher rates in June) the dovish message from BoE Governor Mark Carney and the hawkish statement from the central bank’s chief economist Andy Haldane, it appears that the BoE is attempting to pull off a delicate balancing act. Talk of higher rates is being employed to prop-up the Pound and keep inflation under control, while the actual policy remains loose to foster business confidence and boost liquidity.
Softer Brexit Approach Supports Sterling
The Pound managed to drift slightly higher versus the US Dollar towards the end of the week as Theresa May offered to guarantee the rights of EU citizens living in Britain. The move was seen as a softening of the UK’s Brexit negotiating stance, which could lead to more amicable discussions and lessen the chance of Britain crashing out of the union without a new EU trade deal. The ‘Greenback’ was also hurt by a slowdown in US private sector output, with the composite PMI sinking from 53.6 to 53.0.
Week Ahead
There is potential for the US Dollar to rally versus the Pound this week. The Fed intends to raise interest rates one more time in 2017 but markets only foresee one further interest rate hike (in March 2018) between now and the end of 2018. This means that a bout of positive data could lead to a deluge of Fed rate hike bets that could conceivably send GBP/USD lower.
There are a number of high profile US ecostats due for release this week, which could lead to a turnaround in Dollar sentiment. However, US economic data momentum (measured by the US Citit Economic Surprise Index) is currently running at a six-year low, meaning that another disappointing stream of data could heap more pressure on the ‘Greenback’.
In terms of the Pound, it will be interesting to see whether BoE Governor Mark Carney uses his financial stability report to remove some of the liquidity boosting measures that were brought in as a response to last year’s shock Brexit vote. Any signs of normalisation could boost Sterling, while any further talk of loose policy could damage demand for the Pound.