GBP/USD Exchange Rate Misses out on Two-Month Highs
The Pound to US Dollar exchange rate failed to strike new two-month highs following a breakthrough in the Brexit negotiations, but there is potential for further GBP/USD strength going forward.
Brexit Breakthrough Gives GBP/USD Exchange Rate Small Boost
Pound Sterling (GBP) exchange rates initially rallied late last week in reaction to news that the British government had finally cleared the way to start discussing future trade with its largest trading partner, the EU.
However, GBP/USD did not reach new multi-month peaks and the Pound struggled to hold onto its initial gains.
Market futures data suggests that investors are beginning to tentatively bet that Sterling could strengthen in the future – now that a disorderly Brexit is seen as significantly less likely – but the moves were not as decisive as many had anticipated.
GBP/USD Exchange Rate Forecast: Fed and BoE Policy Decisions on Tap
In order for the GBP/USD exchange rate to register new gains this week, we’ll need to see a cautious message from the Federal Reserve and an optimistic statement from the Bank of England.
The Fed is widely expected to raise interest rates by 25 basis points on Wednesday.
The decision is pretty much priced-into the ‘Greenback’, meaning that USD is unlikely to appreciate rapidly on the news, but could find itself sliding if market bets are disappointed.
In order for the US Dollar to strengthen we’ll need to see Fed policymakers raise their forecasts for monetary tightening in 2018.
The BoE, meanwhile, is unlikely to alter policy at this juncture. But there is potential for Sterling to become more appealing if Governor Mark Carney explicitly mentions the recent Brexit breakthrough, as this would probably lead to an increase in 2018 BoE hike bets.
Other ecostats to look out for include the US CPI report, US and UK retail sales and the UK labour market print. While British inflation, which hit 3.1% in November, is outpacing UK wage growth, the Pound could respond positively if average earnings accelerate from 2.2% to 2.5% as expected.