Pound to US Dollar Exchange Rate Recovers From 2018 Lows on BoE Speculation
Tuesday’s testimonies from Bank of England (BoE) officials gave a surprise boost to the Pound to US Dollar (GBP/USD) exchange rate, helping the pair to recover following its Monday tumble.
After sliding from 1.3541 to 1.3466 last week, GBP/USD saw another slump on Monday and touched a low of 1.3399. This was GBP/USD’s lowest level of the year so far, but the pair quickly rebounded.
At the time of writing on Tuesday, GBP/USD trended closer to the week’s opening levels again. However, whether the pair continues to advance in the coming days and weeks depends largely on this week’s key UK ecostats.
Both the Pound (GBP) and US Dollar (USD) have seen mixed demand so far this week. The Pound has been held back by Brexit uncertainties, while markets took a break from buying the US Dollar amid a long-lasting rally.
Pound (GBP) Exchange Rates Recovers from 2018 Lows as Bank of England Hints at Rate Hikes
Could the Bank of England (BoE) really hike UK interest rates around six times over the next three years? That’s what BoE policymaker Gertjan Vlieghe predicts.
As part of a testimony to the UK Treasury about the health of Britain’s economy and the bank’s monetary policy outlook, Vlieghe stated that he sees a ‘gradually rising path of interest rates’ over the coming years.
He predicts one of two quarter-point rate hikes over the next three years. This would leave the UK interest rate, currently at 0.5%, at around 2% by 2021.
His comments came in despite of poor UK ecostats over the last month. This is because BoE officials, including Governor Mark Carney, believe that a lot of the economic slowdown seen in Q1 2018 was caused by bad weather.
Still, the Pound’s strength was limited as Vlieghe’s comments did little to ease the broad uncertainties currently seen in Britain’s economic and political outlooks.
Multiple bank policymakers also noted that the UK economy was showing more certain signs of having been negatively impacted by the Brexit vote.
US Dollar (USD) Exchange Rates Take a Breather Following Month-Long Rally
The US Dollar could continue to rally due to a solid US economic outlook, rising Federal Reserve interest rate hike bets and stronger market confidence that the US government will seek trade deals rather than become increasingly protectionist.
Demand for the US Dollar briefly soared to a 2018 peak against the Pound on Monday on news that the US and China had seen an optimistic conclusion to its recent trade negotiations.
The optimistic tone of talks prompted the US government to announce that it was putting strict trade tariffs on hold. This made the US Dollar even more appealing.
However, amid expectations that the US Dollar still had further to climb, investors gave the currency a breather on Monday and sold it slightly from its best levels.
According to Gavin Friend from NAB in London:
‘It’s been one heck of a jump for the Dollar across the board really so this looks to me like a bit of profit-taking,’
Pound to US Dollar (GBP/USD) Forecast: Could UK Inflation Improve Sterling Outlook?
As Bank of England (BoE) officials have shown surprising hawkishness regarding Britain’s monetary policy outlook and the nation’s economy, investors will be increasingly focused on upcoming UK ecostats.
The bank’s own optimism is supportive for Pound trade, but markets will be looking for confirmation that Britain’s economy is resilient.
Key ecostats due for publication from Wednesday through Friday are likely to influence the economic outlook and Pound trade itself, depending on how strong it is.
Wednesday’s UK Consumer Price Index (CPI) results could be particularly influential. UK inflation is forecast to remain at 2.5% year-on-year overall, but the core inflation is rate is forecast to have slipped from 2.3% to 2.2%.
If the inflation rate comes in even lower than expected, Britain’s inflation could be perceived as even more subdued than feared and BoE interest rate hike bets would be likely to weaken.
On the other hand, stronger inflation would leave markets more hopeful that Britain’s inflation could remain high enough to sustain tighter monetary policy.
Following the BoE’s relatively confidence that poor weather impacted UK consumer activity in Q1, April’s retail sales results will also be very influential.
If retail sales do not see the bounce back that some investors are hoping for, it will worsen concerns that Britain’s consumer activity is more of a trend than a one-off.
This would keep BoE interest rate hike bets low and make it even easier for the US Dollar to push the Pound to US Dollar (GBP/USD) exchange rate further into 2018 lows.
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