BoE Saunders’ Speech Bolsters GBP/USD Exchange Rate
The Pound US Dollar (GBP/USD) exchange rate advanced for the fifth consecutive week last week as some upbeat sentiment towards Sterling and broad weakness in the US Dollar allowed the pairing to push higher.
The Pound was bolstered on Wednesday by a speech from the Bank of England’s (BoE) Michael Saunders, with markets interpreting his remarks as a sign that the door remains open for a rate hike in 2018.
GBP/USD did stumble at the end of the week as the latest UK retail sales data revealed a sharp fall in December, but the US Dollar remained extremely sensitive to downside risk, with some conflicting messages from Federal Reserve policymakers and the threat of a government shutdown weighing on the currency.
Government Shutdown Pressures US Dollar (USD)
US Dollar (USD) exchange rates have started this week on the back foot again as investors shy away from the currency after Congress failed to agree on a federal budget funding extension.
With talks failing on Friday, and another vote on Sunday delayed until later today, many federally funded departments remain closed as the working week begins.
While the economic impact of the shutdown is expected to be minor, the failure to prevent it has done little to reassure markets over political turmoil in Washington.
Nevertheless, the current dip in the US Dollar may prove to be short-lived with observers confident that today’s vote will pass as both Republicans and Democrats look to avoid being blamed for the shutdown.
Sterling (GBP) Gains Slowed by Consumer Inflation Expectations
On Monday the Pound gave up some of its initial gains following the release of the UK’s latest Household Finance Index.
According to IHS Markit, the index – which measures financial wellbeing – slid from 43.7 to a four-month low of 43.7 in December.
The index shows that concerns over the squeeze in household finances remained strong at the end of 2017, with consumers particularly worried about rising inflation.
In fact, household inflation expectations reached their highest levels in almost four years, with families fearing their spending power will continue to be eroded over the coming year.
This is in direct contrast with the BoE’s outlook, which sees inflation beginning to ease over the coming months.
Despite its gloomy outlook, the survey suggests the UK economy may improve at the start of 2018 thanks to robust workplace activity and day-to-day spending.
Sam Teague, Economist at IHS Markit, said:
‘With rises in both spending and workplace activity, the survey provides a positive signal towards UK economic growth in the first quarter of 2018.’
GBP/USD Exchange Rate Forecast: UK Wage Growth to Bolster Pound?
Looking to the week ahead, movement in the GBP/USD exchange rate is likely to be driven by the release of the UK’s latest employment figures on Wednesday.
Particular focus is likely to be paid to the latest earnings data, with an uptick in wage growth likely to bolster the Pound, easing some of the pressure on consumers.
Meanwhile, the US will publish its fourth quarter GDP figures at the end of the week, with a possible slowing of growth at the end of the year likely to weaken the US Dollar.