GBP/USD Exchange Rate at Highest Point since 23rd June 2016 and Forecast to Hold Levels
Markets were perturbed by a rather lacklustre Cabinet reshuffle from Prime Minister Theresa May, who made few changes to the frontbench and left the biggest players such as Foreign Secretary Boris Johnson and Chancellor Philip Hammond untouched.
With May seemingly having left even problematic members of the Cabinet where they were due to fears of a challenge to her leadership - or even because ministers flat-out refused to be moved or demoted - the ongoing commentary throughout the day was that the whole event had merely highlighted Theresa May’s weakness as Prime Minister.
This caused the Pound Sterling to US Dollar exchange rate to weaken over Monday and Tuesday, with markets once again fearing the Prime Minister lacks the authority required to secure and implement a favourable Brexit deal.
There were also fears that the Prime Minister’s weak position could see the need for another general election this year.
US Dollar (USD) Exchange Rate Demand Undermined as Eurozone and Japan Monetary Policy Outlooks Strength
The US Dollar may have been able to scrape some gains versus the Pound at the start of last week, but developments in the monetary policy outlooks of the Eurozone and Japan towards the end the week saw the US Dollar more-than surrender its latest advances.
The latest meeting minutes from the European Central Bank (ECB), released on Thursday, revealed that the Governing Council is expecting to evolve its guidance on interest rates in response to strengthening economic data.
Meanwhile, Bank of Japan (BOJ) Governor Haruhiko Kuroda gave a much stronger estimate for the pace of core inflation in a speech than the bank had released three months ago, leading to speculation that it could begin reining in loose monetary stimulus sooner than expected.
Even though Friday’s US inflation data surprised with an unexpected acceleration in the pace of core price growth to 1.8%, improving the odds of an interest rate hike in March, markets continued to abandon the US Dollar in favour of the Euro (EUR) and Japanese Yen (JPY).
Quiet Week for UK Data Ahead but GBP/USD Exchange Rate Volatility Predicted on UK Consumer Price Index Release
Tomorrow’s UK consumer price index figures for December could cause volatility for the Pound; although weakening inflation usually prompts traders to sell out of a major currency, in this case a realisation of forecast ten basis-point decrease in overall and core inflation could boost GBP.
This is because the Bank of England (BoE) seems unlikely to raise interest rates again in the near-term and inflation is holding back consumer spending - a slowdown in inflation would therefore reduce the strain on household budgets, making it easier to maintain the current levels of consumption.
The only development on Wednesday’s data calendar will be a speech from BoE official Michael Saunders.
Saunders is one of the more hawkish members of the Monetary Policy Committee (MPC), so there is a chance he could say something upbeat to boost Sterling exchange rates.
Markets will then have to wait until Friday’s December retail sales figures, assuming nothing political or Brexit-related materialises in the meantime.
Minor US Data Forecast to Firm Rate Hike Odds & Undermine GBP/USD Exchange Rates
The only piece of top-tier US data is the preliminary University of Michigan sentiment index for January released on Friday, which is forecast to show a solid rise from 95.9 to 97.
This could help the US Dollar to recover some more ground, given that the day’s UK retail sales figures are predicted to show a decline on the month.
The preceding days contain only low and medium-impact releases, but these could all help to firm the case for a March rate hike if they print positively.
Following the strong inflation data on Friday, every minor sign of strength in the US economy is likely to pile additional pressure on policymakers, therefore boosting the US Dollar.