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GBP to USD Exchange Rate Ends Week Near Post-Brexit Highs on Bank of England (BoE) Bets

April 13, 2018 - Written by Toni Johnson

Underwhelming UK data was not enough to keep the Pound weak last week, as the British Pound to US Dollar (GBP/USD) exchange rate put in solid gains throughout the week thanks to bets of Bank of England (BoE) hawkishness, as well as geopolitical tensions weighing on the US Dollar.

Thanks to broad Pound strength and heavily mixed US Dollar performance, GBP/USD put in its second consecutive week of gains and climbed from the week’s opening levels of 1.4087 to near a high of 1.4291. This high was the best GBP/USD level since the 2016 Brexit vote.

GBP Continues to Climb as Bank of England (BoE) Bets Firm

Investors still widely expect the Bank of England (BoE) will hike UK interest rates again in its May policy decision next month, and as a result the Pound has seen solid performance over the last week despite some underwhelming UK ecostats.

While Wednesday’s UK manufacturing and industrial production results came in lower than analysts expected and NIESR’s UK Gross Domestic Product (GDP) estimate was also underwhelming, these had little notable influence on BoE bets.

Instead, investors are looking ahead to next week’s key UK datasets or watching for any changes in tone from BoE officials.

According to Joshua Mahony, market analyst from IG, market expectations for a BoE interest rate hike are likely the main reason Sterling has performed so strongly this week – which has also weighed on the UK stock market;

‘Dovish minutes from the European Central Bank yesterday, coupled with a wider story of US Dollar weakness has ensured the Pound continues to outperform against its main peers.

With the Pound hitting a two-month high against the dollar and ten-month high against the Euro, it comes as no surprise that the internationally focused FTSE 100 suffers, while the domestically focused FTSE 250 joins its European counterparts in the green.’

The Pound seemingly broke through some key resistance levels towards the end of the week, as Bank of England (BoE) bets and market optimism that the UK was headed for a ‘softer’ Brexit bolstered the Pound outlook.

USD Weighed as Trade Uncertainties and Geopolitical Jitters Persist

Uncertainties in the US have prevented the US Dollar from seeing a more sustained recovery over the past week.

While trade jitters have faded somewhat and investors are slightly more optimistic that the US and China will work together to avoid a ‘trade war’ from breaking out, other geopolitical concerns weigh on the US Dollar instead.

Markets are concerned due to heated rhetoric from the US regarding recent issues in Syria. Fears have risen that the US could be pressured into taking military action in Syria.

This has made investors hesitant to take risks and has also weighed on the US Dollar itself.

As well as geopolitical uncertainties weighing on the US Dollar, recent US data has been mixed and this has made investors hesitant to bet too heavily on the chances of four interest rate hikes from the Federal Reserve this year.

The Fed has been largely predicted to hike US interest rates three times in 2018, but the bank’s hawkishness in its latest meeting minutes slightly boosted bets that the bank could hike four times instead.

However, recent US data has been mixed. Friday’s US consumer sentiment survey projections unexpectedly slipped from 101.4 to 97.8, below the forecast 100.5. Inflation expectations also slipped, from 2.8% to 2.7%.

GBP/USD Forecast: Key UK Inflation Stats Ahead

The Pound to US Dollar exchange rate is likely to be influenced by UK Consumer Price Index (CPI) results next week, especially as Bank of England (BoE) bets have been a major driver for Sterling recently.

Britain’s March inflation results will be published on Wednesday. Inflation is currently forecast to have slipped slightly from 0.4% to 0.3% month-on-month and remain at 2.7% year-on-year.

Notably, core inflation is forecast to have improved from 2.4% to 2.5%. If UK core inflation does rise as forecast, markets will be confident that UK inflation will be strong enough to sustain higher interest rates over the coming year.

However, if core inflation falls short of forecasts this could weaken BoE bets and the Pound.

UK wage growth data, due on Tuesday, could also influence Sterling trade.

March retail sales results will be published next week too, for the US on Monday with UK retail data due for publication on Thursday.
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