The Pound to US Dollar exchange rate (GBP/USD) struck a fresh 27-month high of 1.6485 last week in reaction to a surprisingly optimistic fall in the UK Unemployment Rate from 7.6% to 7.4%. Sterling’s ascent was also helped by the Federal Reserve’s decision to taper asset purchases by just $10 billion a month and alter its forward guidance to suggest that interest rates will not be raised until Unemployment falls “way below” the 6.5% threshold.
Sterling began 2013 trading at a 16-month high of 1.6381 against the US Dollar thanks to a last minute deal to stop the US economy falling over the ‘fiscal cliff’. However, GBP/USD swiftly declined from that level during January as a deadly cocktail of credit rating downgrade fears, quantitative easing speculation and the threat of Britain falling into a triple-dip recession seriously impacted demand for the Pound.
By July, Sterling had fallen to a 3-year low of 1.4813 as markets reacted to the Federal Reserve’s announcement that it was considering tapering its asset purchasing programme.
However, the Pound’s fortunes took a change for the better during the second half of the year as economic growth accelerated, historical GDP data was modified to revise away the double-dip recession and new Bank of England Governor Mark Carney rolled out a forward guidance policy stipulating that interest rates could be raised if the labour market improves or if CPI inflation persists above the 2.0% target.
With Service Sector output – which accounts for around 75% of UK economic output – reaching a 16-year high and other private sector data releases also coming in at multi-year highs, GBP/USD finally breached the psychologically significant 1.6300 level during the last week of November.
Since then the Pound to US Dollar exchange rate has oscillated between technical support at 1.6230 and the 27-month high of 1.6485, and it is likely that GBP/USD will remain above 1.6300 throughout the festive period of low volatility.
The only UK data release on the schedule for this week is likely to see BBA Mortgage Approvals rise by 44,500, which, to all intensive purposes, is unlikely to have a massive impact on Sterling trading.
In terms of US data, there is a little more to look forward to. Personal Income is set to rebound from -0.1% to +0.5%, the University of Michigan Confidence index is forecast to improve from 82.5 to 82.6 and Durable Goods Orders are expected to rebound from -2.0% to +1.3%. The American dataset is likely to mildly increase demand for the ‘Greenback’, but with liquidity muted it is reasonable to suggest that GBP/USD will not fall back below 1.6300.
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