The Pound to US Dollar exchange rate reached a series of 10-month highs last week as Federal Reserve rate hike bets receded on concerns over soft inflation.
GBP/USD Exchange Rate Holds Above Psychological Support
GBP/USD remained above longstanding psychological support for most of last week’s session. The US Dollar stumbled on Monday following a report from the International Monetary Fund indicating that US President Donald Trump was unlikely to deliver his infrastructure and tax reform plans. The IMF cut its US GDP forecasts from 2.3% to 2.1% in 2017 and from 2.5% to 2.1% in 2018.
A strong US consumer confidence print of 121.1, the second-highest figure since 2000, helped shore up demand for the ‘Greenback’ on Tuesday. However, ‘Cable’ rallied to a fresh 10-month high on Wednesday.
GBP/USD Strikes 10-Month High Following Fed Inflation Warning
Second quarter UK GDP printed at 0.3% on Wednesday, marking a slender improvement on the Q1 expansion of 0.2%. The figure was largely influenced by growth in the service sector, while industrial and construction output declined. Traders concluded that the soft growth score would not boost Bank of England rate hike chances and therefore Sterling did not strengthen significantly following the print.
During the evening, however, GBP/USD jumped almost 100 pips following the Federal Reserve’s decision to leave interest rates on hold and flag soft inflation as a key concern. Investors do not believe that the US central bank will raise rates again this year and the inflation warning was seen to support this argument.
US Dollar Remains Under Pressure Despite Doubling of Growth
Sterling touched fresh 10-month highs against the US Dollar on Friday despite US growth printing at 2.6% in the second quarter – more than double the 1.2% GDP expansion in the first three months of the year.
The headline growth reading failed to ignite demand for the ‘Greenback’ because accompanying data showed that wage growth slowed from 0.8% to 0.5% and that the personal consumption expenditure gauge of inflation slowed from 1.8% to 0.9% on the quarter. This was seen to cement the view that US rates would not be rising again in 2017.
GBP/USD Forecast for the Week Ahead
The Pound should manage to hold onto its recent gains versus the US Dollar this week, providing there is no sting in the tail of the Bank of England’s quarterly inflation report.
The BoE is expected to leave policy on hold, with a vote of 6-2 against raising rates in August. We could see GBP/USD fall back if Governor Mark Carney talks down the prospect of a near-term rate rise, or if less than two policymakers vote for a hike this time out.
On the other hand, we could see Sterling pop if more than two policymakers side with the hawks, or if the Governor opts to verbally bolster the UK currency with hints at future policy tightening.
Also on the agenda is the US non-farm payroll report, which is tipped to see jobs growth moderate from 222,000 to 180,000 in July. While this would represent a positive figure, the ‘Greenback’ may struggle to catch a bid due to the overriding concerns over below-target US inflation.
GBP/USD could also witness fluctuations around the time of the UK service sector PMI, which is anticipated to show moderate growth. Indeed, the Pound struck a fresh 10-month high earlier this morning when the manufacturing PMI rose unexpectedly from 54.2 to 55.1.
Any upward surprises in the more influential services report could boost GBP/USD further, while any negative shocks could take the wind out of Sterling’s sails.