The Pound to US Dollar exchange rate (GBP/USD) remained fairly flat just above 1.6400 for the majority of yesterday’s session as a dearth of fresh economic data led to muted market volatility.
However, things could change this afternoon when incoming Federal Reserve President Janet Yellen gives a speech on monetary policy to the House.
The majority of investors expect Yellen to play down the recent downturn in American economic indicators in order to show markets that the Fed is likely to continue the process of tapering its expansive asset purchasing scheme.
Some economists have suggested that the US Central Bank should pause tapering due to the negative impact that the recent inclement weather has had on economic output. Although the official US Unemployment Rate is currently at a 5-year low of 6.6%, the last two Non-farm Payroll reports have printed at significantly lower levels than analysts had expected.
December’s NFP printed at 74,000 compared to forecasts of 197,000, whilst January’s came in at 113,000 compared to estimates of 180,000.
On top of that, the ISM Manufacturing index, which is considered the most important indicator of factory output, tumbled from 56.5 to 51.3 in January. The monthly decline of -5.2 points was the fifth largest since records began in 1948 and the sub index for new orders fell at the steepest rate for over 30 years.
If Yellen opts to highlight the aforementioned disappointing economic readings then Sterling could rally strongly against the ‘Greenback’ as traders pare back their QE3 taper expectations.
However, it is more likely that the Fed will continue with the tapering process and this afternoon’s speech from Janet Yellen is likely to convey that message. This is because A) unusually cold weather has contributed to the soft readings and the overriding trend in the US economy remains positive, and B) the Fed is keen to avoid uncertainty among financial markets and therefore will attempt to provide continuity with its monetary policy to the greatest extent that it can. If the US Central Bank signals that it intends to continue reducing stimulus then demand for the US Dollar could improve and GBP/USD could fall back below significant support at 1.6300.
There are no significant UK data releases today but tomorrow sees the Bank of England take centre stage as it releases its Quarterly Inflation report. If the BoE modifies its forward guidance policy, as it is widely expected to, then Sterling could come under pressure as investors cut down on rate hike bets.
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