January 15, 2018 - Written by
STORY LINK GBP to USD Exchange Rate Jumps Half a Cent on Rising Global Growth Outlook
Despite last week’s strong US inflation report, the British Pound to US Dollar exchange rate has continued to climb since markets opened this week. Market hopes for a ‘soft Brexit’, as well the rising global growth outlook, have made it difficult for the US Dollar to hold its ground.
Thanks to soft Brexit hopes, GBP/USD surged last week. The pair opened the week at the level of 1.3567 and ended the week over a cent higher, at 1.3726. GBP/USD continued to climb on Monday and tested highs of 1.3809. This was the pair’s best level since the day of the Brexit result in 2016.
GBP Supported by Rising Signs of Possible ‘Soft Brexit’
Sterling trade was relatively bearish towards the end of 2017, but the currency has performed slightly stronger this year so far as markets indulge in fresh hopes that upcoming UK-EU negotiations could end with a softer Brexit.
The Pound became more appealing on Friday, following a report claiming that finance ministers from Spain and The Netherlands had urged to push for a Brexit deal that would leave Britain close to the EU.
Amid concerns about Britain’s close relationships to Spain and The Netherlands in terms of trade and investment, the finance ministers were anxious about the future of the nations’ relationships – according to an anonymous source.
While officials denied the reports, investors remained hopeful that Spain and The Netherlands could indeed become UK allies in negotiations due to the nations’ close ties to Britain.
Neil Wilson from ETX Capital explained the improved market sentiment towards Sterling since last week;
‘Although the comments came from just two ministers who don't necessarily speak for the Barnier team as such, there is a sense that the direction of travel for the UK with regards Brexit is a lot more positive than it was prior to December.
We also have positive language around financial services and the prospect of Britain paying for market access.’
However, other analysts have warned that further weakness is still ahead for the Pound despite the slightly improved Brexit outlook.
The Brexit process still has the potential to cause big losses in Sterling trade and Britain’s economy is still performing below trend due partially to the uncertainty surrounding Brexit.
USD Weakness Persists as Global Growth Outlook Gradually Improves
The US Dollar’s 2018 bearish streak continued last week and the US currency fell further when markets opened on Monday, despite last week’s US Consumer Price Index (CPI) report beating expectations in core prints.
While the yearly inflation rate slowed from 2.2% to 2.1% as expected and the monthly figure missed 0.2% predictions to print at 0.1%, the core inflation results were higher than expected in both prints.
Core inflation climbed from 0.1% to 0.3% month-on-month, better than the expected 0.2%. Meanwhile the yearly figure unexpectedly rose from 1.7% to 1.8%.
Despite these results being generally impressive and leading to higher Federal Reserve
interest rate hike bets for 2018, US Dollar demand was limited.
Markets expect that other major central banks will also be hiking interest rates in 2018 as the global growth outlook improves. With global growth looking up, demand for the US Dollar as a ‘save haven’ currency has been limited.
GBP/USD Forecast: UK Inflation Report in Focus
The Pound to US Dollar exchange rate could extend its recent gains on Tuesday if Britain’s upcoming December Consumer Price Index (CPI) report beats expectations.
UK inflation is forecast to have slowed from 3.1% to 3% year-on-year in December and have risen from 0.3% to 0.4% month-on-month. The core inflation print is expected to slip from 2.7% to 2.6% year-on-year.
If UK inflation comes in higher than expected, it will boost speculation that UK price pressures are strong enough to sustain tighter monetary policy from the Bank of England (BoE)
over the coming year.
On the other hand, weaker UK inflation could leave Sterling limp as the currencies only appealing points will be limited ‘soft Brexit’ hopes and speculation.
Still, the US Dollar is unlikely to be boosted higher by US data in the coming sessions.
Wednesday’s US production stats and Thursday’s housing data could influence USD trade slightly, but overall GBP/USD is more likely to be driven by central bank speculation and Brexit news for most of the week.
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TAGS: Pound Dollar Forecasts