British Pound Forecast: GBP/USD Looks to UK Inflation Data for Directional.
GBP/USD Looks to UK Inflation Data for Directional Outlook
GBP Forecast: Looking to UK Inflation Data for Directional Outlook
The British Pound is expected to stay in a tight range versus the US Dollar this week as investors continue to weigh monetary policy decisions by the Bank of England. This week, market watchers will pay particular attention to UK inflation and unemployment data as well as other economic data from around the world.
Inflation: The Biggest Driver of GBP Currency Forecasts
The main driver of the value of sterling has been UK inflation, which can be viewed as a gauge of how strong the economy is growing. The pound usually falls when there is a decline in inflation, and it usually rises when the economy gets stronger.
Inflation rates have stayed low since the financial crisis of 2008 and are expected to remain there for quite some time. However, the Bank of England is considering a Quantitative Easing (QE) program to increase the money supply and help stimulate growth. This can have a significant impact on the pound, especially since the UK’s economy is still very vulnerable to slowing or collapse.
Expectations for UK Inflation: The underlying UK inflation rate is expected to fall slightly in December, which could alleviate recession fears and support the pound. A rise in wage growth may also help bolster expectations for the Bank of England to hike interest rates in the future.
US Inflation: The next round of US inflation data is set to be released this week, and the results are expected to be slightly lower than last month’s numbers. This is expected to boost Treasury yields, which will increase demand for the pound and support the GBP/USD exchange rate this week.
UK Employment: The latest UK employment data showed a smaller than expected fall in jobs for November, pointing to continued resilience in the labor market. This data could also support the BoE to raise interest rates before the Federal Reserve, which could increase demand for the pound.
The pound was on a tear this past week, with the GBP/USD pair trading at its highest level against the US dollar since early December. However, a weaker-than-expected reading in UK industrial production and manufacturing output weighed on the Pound.
Traders were also awaiting the UK CPI report for further clues about the Bank of England’s monetary policy plans. The January report was expected to show that the Bank of England would continue to hike interest rates until it saw inflation drop back to its 2.0% target.
The Bank of England has already boosted interest rates twice this year, and it is likely to hike another 25 basis points in March, which could push the Bank Rate up to 4% by the end of the year. However, if the rate rises above 4%, the Bank of England could consider cutting rates again in the future to reduce the risk of a recession.
