The Pound to US Dollar exchange rate has performed well so far this week but could run into trouble if the Bank of England fails to hike UK interest rates on Thursday.
GBP/USD Fluctuates as British & US GDP Reports Beat Expectations
Last week saw the GBP/USD exchange rate fluctuate as a couple of sturdy ecostats took turns in supporting each currency. Sterling racked up around 100 pips of gains following news that British GDP expanded 0.4% in the third quarter, beating expectations of 0.3%.
The sanguine figure was seen to bolster the probability of a BoE rate hike this week. However, demand for GBP/USD softened towards the end of the week as a weakening Euro and a 3.0% annualised US GDP print drove investors towards the ‘Greenback’.
Rising BoE Rate Hike Bets Bolster GBP/USD
Sterling has strengthened versus the US Dollar over the last few days due to hopes of a 25 basis point rate rise from the BoE on Thursday. A hint of positive news in the Brexit talks, with EU chief negotiator Michel Barnier intimating that he is ready to speed up the process, has also supported the Pound.
However, there is potential for GBP/USD to moderate even if the UK central bank does tighten policy for the first time in over a decade. If the BoE were to raise rates but issue a clear signal that no further rate hikes are on the horizon we could see Sterling soften as traders lock in profit.
Meanwhile, if officials vote against raising rates this week we could see the Pound sustain serious losses. On the other hand, a 25 basis point hike and a sign that further increases are on the table could send GBP/USD spiking.
US Non-Farm Payrolls Report Takes Backseat
With the expected BoE rate rise taking centre stage, data prints could prove less impactful than usual. The UK manufacturing and service sector numbers are expected to remain at steady levels and therefore may not alter the Pound.
Over in the US, markets expect a robust US non-farm payrolls print of around 300,000, but that number is likely to be discounted as a rebound following the -33,000 reduction in jobs during September (as a result of the damage done by Hurricanes Harvey and Irma).
The Federal Reserve is also due to announce its policy decision this week, but traders are only pricing a 2% chance of a rate rise at this juncture. Even if the Fed gives a strong indication that a December hike is on the table it is only likely give the ‘Greenback’ a mild boost, as market futures point to a 96% chance of a rate rise at that meeting already.