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Pound Sterling Forecast to Rise vs US Dollar as BoE Vlieghe Acknowledges 'Growing Need for Near-Term Rate Hike'

September 15, 2017 - Written by Frank Davies

The pound to dollar exchange rate ended the week at the best levels since the EU Referendum vote last year.

Cable is quoted at 1.35925 on Saturday, September 16.

GBP/USD continued to climb on Friday as Bank of England (BoE) member Gertjan Vlieghe unexpectedly expressed hawkish sentiment.

GBP Surges as BoE Vlieghe Claims that Rate Hike Could be Warranted

Vlieghe, traditionally regarded as a dovish member of the Monetary Policy Committee (MPC), surprised markets today by claiming that he may support raising interest rates in the near-term.

Markets are regarding this shift as evidence enough that Vlieghe is now in the ‘hawkish’ camp, along with BoE Governor Mark Carney and Andy Haldane, seemingly raising the probability of a rate hike taking place as early as November.

Vlieghe cited two notable points within his reasoning; the first being the UK’s accelerating rate of inflation, with the headline figure recently printing at 2.9%, higher than the forecast of 2.8%, and the second being UK unemployment, which remains at record lows.

Vlieghe stated:

‘The majority of members of the (Monetary Policy) Committee, myself included, see that that balancing act is beginning to shift, and that in order to … return inflation to that 2% target in a sustainable manner, there may need to be some adjustment of interest rates in the coming months. Now, we will take that decision based on the data. I guess that possibility has definitely increased’.

This revelation shocked investors, propelling the Pound to heights not seen since the Brexit vote took place. Beyond this though there remains concern amongst the markets, especially regarding the outlook for the economy in light of the extreme uncertainty that Brexit still poses.

Vlieghe and Carney’s comments, however, might be an indication that inflation woes may be overtaking Brexit as priority.

US Retail Sales and Michigan Consumer Sentiment Disappoint, USD Stumbles

Month-on-month retail sales in the United States fell unexpectedly by -0.2% in August, far below the market forecast of a 0.1% rise and indeed failing to beat the previous period’s downwardly revised 0.3% gain. This marked the first drop in retail sales since February and was primarily caused by a -1.6% fall in auto sales brought on by Hurricane Harvey.

It should be noted, however, that auto sales are expected to eventually get a significant boost due to the replacement of flood-damaged vehicles in the near-future.

Year-on-year, however, retail sales increased 3.2% in August, demonstrating a strong underlying domestic demand.

In addition, the University of Michigan Consumer Sentiment for the US demonstrated a fall to 95.3 in September from 96.8 in August, though this figure did beat the forecast of 95.1. Nonetheless, this was the lowest reading in the survey in three months, with both Hurricane Harvey and Irma raising extreme concerns regarding the outlook for the national economy.

The ‘Greenback’ soon pared some of its recent gains as a result, further cementing Sterling’s lead into the trading week’s end.

GBP USD Forecast: Volatility in the Week Ahead

Next week will feature a range of significant data events, with Monday kicking things off with a speech from BoE Governor Carney, who will be delivering a speech in Washington DC.

Markets will be carefully assessing Carney’s statement in an attempt to read his sentiment, if he further reinforces his hawkish comments made on Thursday then GBP USD will likely climb even further. He could, however, decide not to comment on monetary policy, which could cause some investors to grow anxious that his attitude has changed.
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