The Pound to US Dollar exchange rate tumbled from a 14-month high last week following an announcement from the Federal Reserve indicating that policymakers plan to begin unwinding QE in October and raise interest rates in December.
BoE’s Carney Prompts Sterling Selloff
‘Cable’ slid by around a cent last Monday in response to Bank of England (BoE) Governor Mark Carney’s warning that any potential UK rate rises would be ‘gradual and limited’. Investors locked in profit from the 14-month high Pound to US Dollar exchange rate following the announcement.
Sterling performed better on Wednesday morning, following news that UK retail sales jumped 1.0% in August. The better-than-anticipated score drove the annualised retail sales volumes figure up to 2.8% – double market forecasts of 1.4%. GBP/USD briefly touched a new 14-month high later in the day.
Surprisingly Hawkish Fed Boosts US Dollar
However, the ‘Greenback’ witnessed a surge across the board during the evening when the Federal Reserve said that it would begin unwinding its $4.5 trillion balance sheet in October. The Fed’s ‘dot plot’ graph also pointed to a rate hike in December, which drove market expectations of another round of 2017 policy tightening from 53% to 73% and bolstered the appeal of the US Dollar. GBP/USD depreciated by around -70 pips following the statement.
The Pound recovered a little on Thursday on hopes of Brexit clarity from UK Prime Minister Theresa May. However, demand softened on Friday following May’s speech, which featured calls for a two-year transition period maintaining access to the EU’s single market, but did not give any concrete details on the government’s future relationship with its biggest trade partner.
Pound US Dollar volatility Likely on Week’s UK & US GDP Data
The Pound gave up a little bit of ground to the ‘Greenback’ over the weekend in response to Moody’s decision to downgrade the UK credit rating one notch. We could also see GBP/USD soften further through the week if US GDP outperforms the UK’s.
The annualised second quarter US GDP print is tipped to come in at 3.1%, while the UK equivalent is likely to print significantly lower at 1.7%. This could allow the US Dollar to strengthen as ‘Cable’ continues to slip from last week’s 14-month high. The ‘Greenback’ could also benefit from Fed Chairwoman Janet Yellen’s speech on monetary policy, which could feature additional hawkish rhetoric.