‘Cable’ slipped from a 10-month high last week as softer-than-anticipated UK inflation data weighed on the Pound.
UK Inflation Slows Unexpectedly
The Pound to US Dollar exchange rate declined by around a cent at the start of last week’s session following a surprise downtick in the UK consumer price index.
Underwhelming expectations of a hold at 2.9%, the inflation figure printed at 2.6% in June, prompting traders to reduce their projections for an interest rate hike from the Bank of England.
Sterling would have suffered further losses had it not been for US President Donald Trump’s failed attempt to repeal the Obamacare healthcare bill.
The idea that Trump, aided by a Republican majority in both the House of Representatives and Senate, was not able to pass a healthcare bill spooked markets as it was seen to pour cold water on the President’s ambitious (and likely market boosting) tax cut and infrastructure spending policies.
GBP/USD Dips Below Key Psychological Support
‘Cable’ dipped below key psychological support last week in reaction to concern over the government’s Brexit strategy. Sterling depreciated following comments from UK trade minister Liam Fox suggesting that Britain could get by without a new Brexit trade deal.
The statement alarmed investors, who believe that a new trade deal with the EU is crucial to the future performance of the British economy.
GBP/USD grappled with psychological resistance on Friday and managed to settle above that level at the beginning of this week’s session.
Federal Reserve Interest Rate Decision Ahead
The three major events to look out for in terms of Pound to US Dollar exchange rate movement this week are the UK second quarter growth print, the Federal Reserve policy announcement and the US Q2 GDP report.
British GDP is tipped to have accelerated minimally from 0.2% to 0.3% in the second quarter, however, it would probably take a score of 0.4% or higher to give GBP/USD a significant boost. Anything lower than 0.3% could depress demand for ‘Cable’.
Across the pond, the Fed is widely expected to leave rates on hold at this juncture, meaning that markets will likely hone-in on the accompanying statement. If Fed Chairwoman Janet Yellen paves the way for another rate hike in 2017 then the ‘Greenback’ could easily catch a bid.
However, if Yellen strikes a dovish tone then we could see the US Dollar come under pressure as traders continue to push back their Fed rate expectations.
The US economy is tipped to have expanded at an annualised pace of 2.5% in the second quarter, up from 1.4% in Q1. Depending on the tone of Yellen’s statement this could either be taken as a bearish or a bullish signal for the US Dollar.
If Yellen leaves the door open to further policy tightening this year then 2.5% GDP could bolster the ‘Greenback’, but if the Fed Chairwoman talks down rate expectations then it would take a much bigger figure to get markets excited.