On Monday the Pound Sterling to US Dollar (GBP/USD) exchange rate declined to an 18-month low as economists raised their bets that inflation data due later in the week will show that UK inflation will slow below 1% and spur the Bank of England to leave interest rates unchanged until later than previously forecast.
The Pound Sterling to US Dollar (GBP/USD) exchange rate ended the week edging away from a 17-month low amid positive UK economic data and as expectations increased that the US Federal Reserve will not raise interest rates until late April.
Pound Sterling to US Dollar (GBP/USD) Exchange Rate Moves away from 17-Month Low
UK data showed that the nation’s trade deficit narrowed more than expected in November and manufacturing activity increased strongly. The figures eased some of the concerns that the UK economy is experiencing the beginning of a sustained slowdown.
‘That trade data, the headline, has given support to Sterling. Cable is still very vulnerable as it’s vulnerable to movements in the EUR/USD exchange rate,’ said Jane Foley, senior strategist at Rabobank International.
Similarly, economist Maeve Johnston noted that the figures were ‘encouraging signs that the UK’s recovery still had some momentum towards the end of 2014. The improvement in the trade deficit should not be a flash in the pan and the manufacturing sector should benefit greatly from lower costs. As things stand, then, 2015 should be a better year for manufacturers and exporters.’
According to the London based Office for National Statistics (ONS) factory production rose by 0.7% on a month on month basis and rose by 2.7% on an annual basis. Economists had been forecasting for a figure of 0.3% and 2.3% respectively.
Data out of the USA also released on the same day showed that employment in the world’s largest economy increased more than forecast in December and the overall unemployment rate fell from 5.8% to 5.6%. The data rounded up the best year for the US jobs sector since 1999.
Despite the strong US jobs, figures the ‘Greenback’ remained softer against Sterling as a separate report suggested that wage growth rises remain weak. Wage growth is one of the factors mentioned by the Federal Reserve that will determine a rate rise so the disappointing data added to signs that a hike will not occur until April at the earliest.
Pound Sterling to US Dollar (GBP/USD) Exchange Rate Forecast
Looking ahead to next week the GBP/USD exchange rate is likely to remain trading in the region of 1.51 until Tuesday due to that session seeing the release of the latest UK inflation data and US monthly budget statement. Inflation in the UK is expected to have risen from 1% to 1.11% on an annual basis in December and tick higher from -0.3% to 0.05% on a monthly basis. If that is the case then the Pound will likely make gains against the US Dollar and other major peers as concerns over deflation will ease.
After Tuesday, there is little in the way of market moving data out of the UK so we can expect the GBP/USD exchange to experience movement because of data releases from elsewhere.
The main data events for the US Dollar will be Wednesday’s retail sales and Friday’s US inflation data.
The Pound Sterling to US Dollar (GBP/USD) exchange rate 1.5160
