UK Retail Data Could Knock Pound to US Dollar Exchange Rate from Yearly Highs
In the past week the Pound to US Dollar (GBP/USD) exchange rate has tested highs above the level of 1.39 for the first time since the Brexit vote in 2016, but the Pound (GBP) has been unable to hold onto its best levels.
This is because demand for the US Dollar (USD) has improved slightly due to a weaker Euro (EUR) and investors looking to buy the US currency from its lows.
On top of this, investors are anticipating Friday’s session when key data will be published, including Britain’s December retail sales report and Michigan University’s US consumer confidence projections.
The Pound has seen stronger demand since the middle of the week due to comments from Bank of England (BoE) policymaker Michael Saunders.
However, if Friday’s UK retail sales report disappoints investors it could cause GBP/USD to shed some of its recent gains as investors would become more concerned about Britain’s economic outlook.
Pound (GBP) Exchange Rates Supported by Saunders Comments
On Wednesday, Bank of England (BoE) policymaker Michael Saunders stated he had a hunch that Britain’s unemployment rate could beat the expectations of most economists in 2018.
According to a London speech from Saunders;
‘My hunch is that the labour market will probably tighten further this year, with the jobless rate dropping to – and perhaps even below – 4% during 2018, alongside further declines in under-employment,’
He also predicted that in this scenario, UK wage growth would become pressured until it advanced at a pace not seen since the financial crisis.
Overall, his optimistic comments had analysts predict that he could take a more hawkish stance on monetary policy sooner than the rest of his peers and bets of a 2018 interest rate hike from the bank also rose.
This made the Pound more appealing and helped GBP/USD to trend near its best levels since 2016.
US Dollar (USD) Strength Limited on Federal Reserve Outlook Uncertainty
While a weaker Euro (EUR) has helped the US Dollar to perform slightly better in recent sessions its strength is still limited and GBP/USD remains near its best levels since the Brexit vote.
Recent comments from Federal Reserve officials have indicated that officials are still split on how many times US interest rates should be hiked in 2018.
Dallas Fed President Robert Kaplan argued rates should rise three times to prevent the economy from overheating, but Chicago Fed President Charles Evans claimed it would be appropriate to hike rates fewer times.
US Dollar demand was largely unchanged by Wednesday’s US data. US industrial production beat expectations in December, but manufacturing slipped slightly.
Pound to US Dollar (GBP/USD) Forecast to Focus on Growth Stats Next Week
While Friday’s UK retail sales report could influence the Pound to US Dollar (GBP/USD) exchange rate before markets close for the week, the pair is unlikely to see a notable shift in tone.
Next week’s economic data, which includes Q4 Gross Domestic Product (GDP) projections from both Britain and the US, is much more likely to impact the Pound to US Dollar outlook.
Both growth reports will be published next Friday. If UK growth beats expectations, it’s likely that GBP/USD will test fresh post-referendum highs.
Other UK data due next week could keep the Pound appealing too. If Tuesday’s public sector net borrowing and CBI business data impresses, the Pound could start the week off strongly.
Britain’s key November job market report will be published on Wednesday which could also prove influential.
Meanwhile, the US Dollar is likely to remain pressured by Federal Reserve uncertainty, but US home sales data and preliminary January PMIs could also influence the US currency outlook slightly.