Sterling rallied by over 2 cents versus the US Dollar last week to strike a five-week high as hawkish Bank of England rhetoric boosted the Pound.
Reversal of Trump Trade Weighs on ‘Greenback’
The US Dollar has struggled of late due to concerns that US President Donald Trump’s pro-growth economic policies may never see the light of day.
Markets and the Dollar rallied on Trump’s victory thanks to his vague but positive sounding plans to boost economic growth, create jobs and drive wages higher through infrastructure spending and tax cuts.
However, over half a year has elapsed since Trump was elected and there is little to suggest that the President is close to implementing his flagship economic policies. This has led to a reversal of the so-called ‘Trump trade’, leaving the US Dollar short of support.
On Tuesday the IMF reduced its US growth forecasts from 2.3% to 2.1% in 2017 and from 2.5% to 2.1% in 2018. The Fund cited a lack of detail in Trump’s policy plans as reason for the downgrade.
BoE Governor Mark Carney Boosts Pound with Hawkish Rhetoric
Sterling soared ahead against the US Dollar on Wednesday, rallying over a cent in response to Bank of England Governor Mark Carney’s claim that ‘some removal of monetary stimulus is likely to become necessary’ fairly soon if domestic growth and wages begin to increase.
The hawkish shift in the Governor’s outlook massively boosted BoE rate expectations and this in turn bolstered the appeal of the Pound.
BoE chief economist Andy Haldane weighed in on Thursday with additional hawkish remarks, stating that ‘we need to look seriously at the possibility of raising interest rates to keep the lid on these cost of living increases’.
The upbeat comments helped push GBP/USD to a monthly high, despite a slight upgrade to US first quarter GDP from 1.2% to 1.4%.
GBP/USD Hits 5-Week High
‘Cable’ continued to rally on Friday, breaking through significant psychological resistance as quarter-end trading requirements saw the Pound appreciate across the board. Despite the uncertainty of Brexit and a hung parliament, Sterling registered gains of 3.2% against the US Dollar in the second quarter, making it the best quarter for two years.
It was the reversal of the Trump trade and the hawkish shift in BoE rhetoric that allowed Sterling to strengthen versus the ‘Greenback’.
We could see the US Dollar recover some of its lost ground this week. UK manufacturing growth has already disappointed, meaning that BoE rate hike bets could soften if the service sector PMI, which accounts for over 70% of UK GDP, also underwhelms.
The US Dollar also stands to gain if the Federal Reserve’s minutes report contains a strong hawkish message. As things stand the Fed intends to hike one more time in 2017 but markets are not so sure the central bank will follow through. If Fed policymakers show signs of caution, the ‘Greenback’ could suffer.
The last key event is the US non-farm payroll report, which is tipped to come in strongly at 173,000. If the result matches forecasts then the US Dollar could benefit, however, a lower figure could pile more pressure on the ‘Greenback’.