Over the last five days the Pound to US Dollar (GBP/USD) exchange rate has moved from highs of 1.72 to lows of 1.70 in response to rate hike speculation, and with influential economic reports for both the US and UK on the cards for next week additional movement is forecast.
While Sterling was initially pushed to within touching distance of a six-year high against its US counterpart thanks to impressive UK inflation and jobs figures (data which upped the odds of the Bank of England hiking rates in November) US interest rate bets saw the ‘Greenback’ recover losses before the week was out.
Firstly, Federal Reserve Chairwoman Janet Yellen adopted a moderately less dovish stance during recent testimonies to the Senate Committee. Yellen observed that if the current pace of improvement in the US employment sector continued, rates could be raised from historic lows sooner than currently projected. Until now, Yellen has repeatedly stated that rates will remain on hold until long after the Fed’s quantitative easing programme has been completely tapered.
Her comments were followed by some provocative remarks from the President of the Federal Reserve Bank of St Louis James Bullard.
Bullard asserted; I want to make sure there’s a bounce-back in the second quarter and that things look like they are on track to grow at 3% or better in the second half of the year, which is what I am expecting. […] Normalization will take a long time, and current policy settings are far from normal […] Relatively low inflation and relatively weak labour markets have up to now suggested a later start [in raising interest rates] Stronger-than-expected data, rising inflation and rapidly improving labour markets may change this calculus in the months and quarters ahead.’
During European trading on Friday the US Dollar kicked the Pound back below 1.71 despite the fact that a measure of US employment unexpectedly slumped to a four-month low in July.
The University of Michigan Confidence Index surprised expectations by falling from 82.5 to 81.3 in July. Economists had been expecting the measure to rally to 83. Separate US date revealed a 0.3% increase in the Conference Board’s index of leading economic indicators.
Next week the US will publish its Consumer Price Index. We forecast that if the data increases the odds of the Federal Reserve bringing in a rate increase sooner rather than later the Pound to US Dollar (GBP/USD) exchange rate could fall. Conversely, any unexpectedly strong reports from the UK could send the Pound higher.
According to TorFX Head Trader Adam Solomon, the Pound to Euro exchange rate is also in line to experience notable movement. When asked about the GBP/EUR’s performance this week he stated; ‘A sustained deterioration in risk appetite would tend to have a negative impact on the Pound, given the weak balance of payments position with a potential reversal in capital inflows. The Euro found support and attempted a weak rally with underlying sentiment on the single currency still negative on yield grounds. Headline Euro-zone inflation was confirmed at 0.5% with a core reading of 0.8% and there was some moderate relief that the rate had not fallen further. Stresses surrounding Banco Espirito Santo also continued in the background, which undermined confidence in the Euro to some extent.’
The GBP/EUR pairing could fluctuate if next week’s economic reports for the Eurozone up the odds of the European Central Bank introducing quantitative easing style stimulus in the third quarter.
The prospect of additional easing could help the Pound to Euro pairing achieve fresh highs over the next few weeks.
As we head into the weekend the Pound to US Dollar (GBP/USD) exchange rate may maintain it’s slightly softer position.
US Dollar (USD) Exchange Rates
[table width=”100%” colwidth=”50|50|50|50|50″ colalign=”left|left|left|left|left”]
Currency, ,Currency,Rate ,
US Dollar,
,Pound Sterling,0.5862,
US Dollar,,Canadian Dollar,1.0736, 
US Dollar,,Euro,0.7398,
US Dollar,,Australian Dollar,1.0659,
US Dollar,,New Zealand Dollar,1.1530,
Canadian Dollar,,US Dollar ,0.9322,
Pound Sterling,,US Dollar,1.7059,
Euro,,US Dollar,1.3514,
Australian Dollar,,US Dollar,0.9382,
New Zealand Dollar,,US Dollar,0.8673,
[/table]
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