The GBP USD exchange rate put in solid gains over the last seven days, largely due to hopes that the Brexit process would see some progress soon. However, the US Dollar has been able to hold its ground on Fed speculation.
GBP USD climbed from around 1.3067 to 1.3286 last week. The pair continued to trend near its opening levels on Monday morning as both currencies strengthened.
Pound (GBP) Traders Anticipate Brexit Developments and UK Inflation
Sterling put in strong gains over the last seven days, largely due to rising hopes that European Union negotiators were becoming more willing to work with Britain on a Brexit transitional deal.
EU chief negotiator Michel Barnier indicated he agreed with the idea of a transitional deal and also noted that the EU was preparing for UK-EU trade talks.
The EU remains insistent that the UK must make more specific offers on its financial commitments and divorce bills before any new progress can be made.
Still, mutterings have emerged that the EU is wary of recent rumours regarding UK Prime Minister Theresa May’s leadership.
If May faces a leadership challenge, this would make Brexit negotiations more difficult for both sides. Eagerness among EU negotiators that May will keep her role could lead to a more conciliatory tone in negotiations and lead to easier progress soon.
On Monday, Theresa May headed to Brussels for meetings with EU negotiators, in hopes that the ‘deadlock’ in UK-EU talks could finally be broken. This would give the Pound another notable boost.
On top of this, Sterling could see stronger demand if Britain’s upcoming September Consumer Price Index (CPI) results impress investors.
Markets expect UK inflation to have risen from 2.9% to 3.0% year-on-year. If inflation meets or beats expectations, investors will become more hopeful that the Bank of England (BoE) will be pressured into tightening UK monetary policy within the coming months.
This is despite warnings from some analysts that Britain’s economy may not be able to support tighter monetary policy.
Wednesday’s UK wage growth results and preliminary Q3 Gross Domestic Product (GDP) data due next week could also influence BoE interest rate hike bets, which could in turn influence the longer-term Pound outlook.
US Dollar (USD) Supported by Fed Hopes
Last week’s US Consumer Price Index (CPI) results were highly disappointing, worsening concerns that the US economy may not be sturdy enough to support another interest rate hike from the Federal Reserve within the coming months.
US inflation had only risen from 1.9% to 2.2% year-on-year, with the core print remaining at 1.7% rather than rising to 1.8% as forecast. The monthly inflation results also disappointed.
Optimism from Federal Reserve officials had previously left traders betting that the Fed would hike US interest rates in December, which would be the third interest rate hike in 2017.
This is why Sunday’s comments from Fed Chairwoman Janet Yellen helped to give the US Dollar a boost on Monday.
Yellen indicated that while the mixed inflation results remained a mystery to policymakers, she still believed it was appropriate to continue hiking US interest rates. She assumed inflation would see stronger performance in 2018.
This caused bets of a December Fed rate hike to improve when markets opened on Monday, and the US Dollar held its ground against a strengthening Pound.
US data due in the coming days is unlikely to cause notable shifts in US Dollar movement due to its lack of influence.
As a result, the ‘Greenback’ could remain relatively sturdy as markets become more confident that a US interest rate hike is likely for December.
GBP USD Interbank Rate
At the time of writing this article, the GBP USD exchange rate trended in the region of 1.3305. The US Dollar to Pound exchange rate traded at around 0.7518.
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