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GBP USD Stumbles in Anticipation of BoE Carney?s Speech

September 18, 2017 - Written by Ben Hughes

The Pound US Dollar exchange rate stumbled this morning as traders reacted to last week’s positive US inflation figures and grew increasingly cautious before today’s speech from Bank of England (BoE) Governor Mark Carney in Washington DC.

US Inflation Proves Positive, Prospect for Hawkish September Fed Meeting Increases



The US Dollar was bolstered last week by the release of some robust inflation figures and the resulting jump in hawkish sentiment.

Inflation in the US was revealed to have increased by 1.9% year-on-year in August, beating the 1.7% gain in July and indeed the market forecast of 1.8%. This was all the more notable because it was their highest reading in three months, though economists have suggested that this could primarily be due to the rising cost of shelter and gasoline after the damage wrought by storms Harvey and Irma.

As a result, some economists have predicted that the US Federal Reserve is now on track for a December rate hike, with a survey from Bloomberg of some 42 economists suggesting as much.

The survey claimed that, whilst interest rates would likely remain stable at the September meeting, they would rise by a quarter percentage point in the December meeting.

Scott Anderson, Chief Economist at the Bank of the West, supported this assertion, claiming:

‘While transitory factors may stay the Fed’s hand in the short-term, the path to normalization of the fed funds target range should continue in December’.

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Beyond this, many investors have claimed that the central bank will announce the start of a reduction in its $4.4 trillion balance sheet on Wednesday; the reversal of its quantitative easing (QE) scheme notable in signalling an increasingly hawkish trend within the Fed.

Such an event would drive even more demand to the US Dollar, dragging GBP USD down further.

GBP Bearish after BoE Carney Speech



BoE Governor Mark Carney spoke this afternoon in Washington DC and caused GBP/USD exchange rates to slide even further.

Last week Carney took a surprisingly hawkish turn when he sided with BoE Executive Gertjan Vlieghe (also traditionally a dove) who claimed that the time for an interest rate hike was approaching.

Carney 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 percent target in a sustainable manner, there may need to be some adjustment of interest rates in the coming months’.

However, Carney was back on dovish form today, stating that any changes to monetary policy would be gradual and limited.

GBP USD Forecast: Volatility Ahead on UK PM Brexit Speech and US Rate Decision



The two most notable events this week relating to this pairing will be the aforementioned US rate decision on Wednesday and a speech from UK Prime Minister Theresa May in Florence on Friday.

Theresa May’s speech will be addressing the current Brexit deadlock, though to what extent remains to be seen.

It has been suggested that she might use the opportunity to attempt to further quell uncertainty regarding the future of the UK outside of the European Union, a proposal that is certainly consistent with the statement from London.

Some have claimed, however, that she might use the speech to announce something more drastic, like a softening of stance on Brexit negotiations. This would cause a great deal of controversy, especially in the wake of the recent essay from UK Secretary of State for Foreign Affairs Boris Johnson which takes an opposing stance – an essay that some are regarding as a bid for leadership.

If May simply attempts to quell uncertainty for investors and businesses then Sterling might see some gains, if, however, her statements offer no new information and are ineffective at loosening the deadlock, then GBP will remain limp.

Another data print to be aware of will be this week’s UK retail sales figures for August (due Wednesday), which are currently forecast to drop from 1.5% to 1.4%, something that could drive GBP USD down even further.
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