What does the new week hold for the pound sterling v US dollar?
At the weekend we see the pound to dollar rate remains within its upward-moving channel after it was reported that monthly US inflation remained static at 0.3% failing to provide enough for hawkish Fed members to re-engage Janet Yellen on interest rate hikes in the near future.
“Despite energy prices clearly weighing on the inflation outlook, the lack of pickup in consumer spending in the US makes an October rate hike appear questionable,” says Alex Lydall, Senior Trader at Foenix Partners.
The data has allowed the pound to dollar exchange rate (GBPUSD) to hold onto a spot market rate at 1.5579 at the time of writing ensuring the trend higher from April lows around 1.46 remains alive.
With risk sentiment currently rife due to both Greek woes and the concern of the Chinese stock market, the probability of Janet Yellen stalling rate hikes appears to be increasing.
“Sentiment from the Fed remains cautious, and weak inflation is likely to be stopping dollar bulls from jumping into action in the short term,” says Lydall.
Pound on the Front-Foot
Interest rate decision-making remains key to currencies. We have just witnessed the pound sterling register its best week since 2009 on the back of observations that the Bank of England is moving closer to raising interest rates.
The Bank of England’s Governor Mark Carney communicated to markets on the 16th that a rate rise could come in early 2016 should the current economic trajectory be maintained.
However, the majority of sterling’s gains are more likely to come against the euro and other currencies than the bullishly-aligned USD.
“Against the commodity related currencies and the EUR, we remain bullish on currencies where the start of rate hike cycles is approaching, namely the USD and GBP,” says a currency note from Morgan Stanley.
In both cases the commentary from policymakers has become more hawkish in the past week.
Morgan Stanley are cautious about putting too much emphasis on Carney’s recent comments they do note that they are consistent with comments from other MPC members, including Miles.
Concerning the immediate technical outlook for the sterling / dollar pair we hear that those assuming that GBPUSD will continue to rise should be cautious.
Writing to clients ahead of the weekend technical analysts at SEB say:
“The ongoing correction from beneath the ma bands should now be in its latter stages. Ideally the 1.5709 equality point should mark the end to the current rise. So short term look for some additional strength but caution urged as bearish forces soon seen coming into play.”
Minutes Dominate the Outlook
Looking at the upcoming week the BoE minutes from the July meeting will shed further light on the intentions of the MPC - how close are we to that first hike?
With key members of the MPC—Governor Carney included—now taking a more hawkish stance, the minutes from the 9 July policy meeting will be scrutinised carefully.
"We think the vote to keep policy unchanged will be unanimous. The meeting took place under the dark clouds of Greek uncertainties and cratering equity valuations in China. That said, we think hawkish dissents are on the horizon and we expect the minutes to reflect a broadening support for tighter policy going forward," says Ned Rumpeltin at TD Securities.
We note that this is the final month the minutes will be released with a two-week delay.
From 6 August, we will see the simultaneous release of the policy announcement, minutes, and Quarterly Inflation Report.