The Pound Sterling to US Dollar (GBP/USD) exchange rate was softer on Monday due to a lack of economic data out of both the UK and USA, however as the week progresses the currency pair is forecast to experience volatility ahead of the Bank of England’s latest inflation report.
The Pound Sterling to US Dollar (GBP/USD) exchange rate hit a session high low of 1.520
First Deflation Forecast in 50 Years?
On Thursday, the Bank of England is expected to warn that the UK is facing its first period of falling prices for half a century as tumbling oil prices sends prices down. Already the nation’s inflation rate is at just 0.5%.
‘We think the Bank might make its first ever central forecast of outright deflation. Falling prices and rising wages could fuel a feel good factor ahead of the General Election in May,’ said Simon Wells, chief economist from HSBC.
Some economists are concerned that deflation could establish itself and lead to a prolonged period of falling prices; such a thing can lead to the crippling of economies as consumers stop spending as they await more price drops. Bank of England governor Mark Carney is suggesting that the UK is heading towards a period of ‘good deflation’ where falling prices leads to families having more cash to spend.
A non-deflation report will boost the Pound
If the inflation report falls to 0% rather than into deflationary territory the Pound could rally strongly against its major peers as economists see that the report could lead to an earlier than expected interest rate hike.
‘Market rate expectations have moved since November, now pricing a first hike well into the second half of 2016; but the factors determining the medium-term outlook do not appear to have moved so convincingly. So, the inflation report may suggest an earlier hike,’ said economists from BNP Paribas.
Sterling could firm on Tuesday if the latest Manufacturing and Industrial Production reports come in strongly. Positive data will ease fears that the UK economy is slowing down.
Also of interest will be the release of the NIESR GDP estimate, which is expected to show that the UK economy will expand by 0.6% in the first quarter of 2015.
Data out of the USA will include job openings and business optimism reports.
