Although the United States remains entrenched in an unusual period of government shutdown, the Dollar managed to appreciate by just under half a cent against
Sterling last week due to poor
UK Manufacturing and
Construction prints.
Sterling stretched the US Dollar to a weekly high of 1.6124 on Tuesday as traders reacted to dark mutterings from White House officials appearing to confirm that Janet Yellen will replace Ben Bernanke at the helm of the world's most influential Central Bank next year. Yellen is seen as even more dovish than Bernanke and therefore she is expected to steer the US economy clear of choppy waters by prolonging the Federal Reserve's expansive asset purchasing scheme. Naturally, the prospect of additional monetary easing had a detrimental effect on demand for the Dollar.
The Pound tanked by just under -2.0 cents against the 'Greenback' on Wednesday as British GDP prospects were hurt by news that the UK Manufacturing Sector sunk to a shock monthly contraction of -1.2% in August, bringing the annualised score down to -0.2%. The downbeat data was accompanied by some worrying Trade Balance figures, showing that the deficit widened by £3.32 billion in August alone.
Sterling recovered slightly on Thursday, rallying back to 1.5980, as the Bank of England elected to leave interest rates unchanged at 0.50% and the level of quantitative easing unmoved at £375 billion. The US Dollar was also hurt by a rather stifling 6-month high Jobless Claims score of 374,000. The poor result, which was significantly higher than the previous weeks' 311,000, is likely to have been influenced by the government shutdown, meaning that the indicator should improve again when the budget debacle is finally over.
GBP/USD retreated again on Friday as UK Construction Output printed at -0.1%, compared to forecasts for a rise of +0.8%. The 'Greenback' was also buoyed by hopes that Republicans and Democrats could be on the verge of clinching a deal to raise the debt ceiling over the weekend…But alas the deal was not reached and the threat of the US government defaulting on its debt obligations returned, which sent the Pound back above 1.6000 when markets reopened for the week.
It is very difficult to predict the direction of GBP/USD this week owing to the uncertainty surrounding the debt ceiling: if policymakers agree on a deal at the eleventh hour, as is widely anticipated/hoped/prayed for, then the Dollar is likely to post a mild recovery against the Pound.
However, if the political impasse continues and the US government is forced to renege on its debt repayments then the tremors would be felt right across the financial spectrum: risk sentiment would dive, liquidity would freeze up and the US Dollar would likely plummet. This scenario is “unthinkable”, according to ECB President Mario Draghi, so perhaps it is best to focus on the more concrete elements of the economic calendar.
Strong UK jobs figures and Retail Sales results are likely to boost the Pound, but another downtick in CPI inflation to 2.6% could impact demand for UK gilts as speculators scale back their forecasts for the Bank of England's first interest rate hike. Overall the outlook for GBP/USD is extremely mixed, volatility is expected so it could be an idea to secure at least a portion of any trades you have in mind sooner rather than later to avoid any negative market movements. (TorFx).
