Update: Underwhelming US Data Failed to Help Pound to US Dollar Exchange Rate Hold its Highs
The Pound was unable to hold its best levels in the afternoon, as comments emerged from the UK government asserting that it would not seek to join an EU customs union.
Chicago’s Fed national activity index was published on Monday afternoon and slipped from 0.14 to 0.12, missing the expected 0.20. Despite this, the US Dollar (USD) recovered from its worst levels against Sterling (GBP).
Pound to US Dollar Exchange Rate Recovers Last Week’s Losses on BoE Speculation
A stronger US Dollar (USD) dragged the Pound to US Dollar (GBP/USD) exchange rate lower last week, but the pair recovered from its worst levels thanks to rising Bank of England (BoE) interest rate hike bets.
GBP/USD opened last week at the interbank level of 1.4027 and on Thursday hit a weekly low of 1.3861 before recovering to 1.3967 by the end of the week. On Monday, GBP/USD climbed again.
The pair’s gains since Friday have been largely due to increasing signals from the Bank of England (BoE) that it could be preparing to tighten UK monetary policy at a faster rate than previously expected.
As BoE officials have continued to hint that Britain’s economy could support tighter monetary policy as soon as May 2018, Sterling (GBP) has seen stronger demand.
Last week saw BoE Governor Mark Carney predict that UK inflation would firm in Q1 2018 and be solid enough to support tighter policy.
Sterling was boosted further on Monday morning by weekend comments from BoE Deputy Governor Dave Ramsden. Ramsden, typically one of the bank’s more dovish members, hinted that rates may need to rise again sooner rather than later.
US Dollar (USD) Exchange Rates Weighed by Fed Uncertainty
This week is set to see new Federal Reserve Chairman Jerome Powell hold his first Congressional Testimony since taking the position.
While analysts do not expect Powell to take a considerably different stance on monetary policy to his predecessor Janet Yellen, there is still uncertainty in markets in anticipation of his comments.
Analysts expect Powell may need to pull off a delicate balancing act to appear between dovishness and hawkishness, so his ability to pull it off is likely to be key for US Dollar trade this week.
Last week’s US data had little overall impact on US Dollar (USD) exchange rate movement. In fact the US Dollar’s strength last week was more due to investors buying the currency back up from its cheapest levels than domestic news.
‘Soft Brexit’ Hopes Bolster Pound (GBP) Exchange Rates
On Monday morning, Britain’s opposition Labour Party laid out its position on Brexit. Labour Leader Jeremy Corbyn stated that the Party would remain in an EU customs union and maintain a close relationship to the EU single market.
Speculation that the Labour Party could support a Conservative backbencher amendment aiming to keep Britain in a customs union post-Brexit have boosted ‘soft Brexit’ hopes in the market. This has given Sterling additional support.
Pound to US Dollar (GBP/USD) Forecast: Central Bank Speculation in Focus
Over the coming sessions, Pound to US Dollar (GBP/USD) exchange rate investors are likely to remain focused on Bank of England (BoE) and Federal Reserve speculation.
Any further comments from BoE officials in the coming days could influence Sterling. The British currency could strengthen further, for example, if BoE officials continue to show confidence that the economy would be able to support higher interest rates.
US Dollar investors, on the other hand, are looking ahead to Wednesday’s Congressional Testimony from Fed Chairman Jerome Powell.
Upcoming US data could also influence the Federal Reserve outlook.
Wednesday will see the publication of Q4’s second US Gross Domestic Product (GDP) projections, followed by Personal Consumption Expenditure (PCE) data on Thursday.
In addition to data releases, GBP/EUR could also be inspired by Brexit developments, particularly if Labour’s clarified position on Brexit causes any reaction from UK government or EU officials.