Last week brought an unimpressive start to GBP/USD movement, but the pairing later ended trading at a significantly higher closing rate.
The Pound started trading against the US Dollar at 1.3179 on Monday and closed at 1.3593 on Friday.
Pound to US Dollar Recap: BoE News almost Reversed Brexit Losses
The Pound almost made history last week, when it rose rapidly against the US Dollar over Thursday and Friday.
Although the Pound was not able to completely reverse the losses caused by the Brexit vote, it still rose back to the highest GBP/USD rate since June 26th.
This major appreciation came from Bank of England (BoE) minutes and comments, all of which raised hopes about the BoE raising interest rates sooner than expected.
The crucial passage of the BoE’s minutes was focused on inflation;
‘All MPC members continued to judge that, if the economy were to follow a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations’.
The Pound surged after the statement came out, even though no new policymakers voted for higher interest rates. Later backing up this statement, BoE Governor Mark Carney said;
‘The majority of members of the (Monetary Policy) Committee, myself included, see that that balancing act is beginning to shift, and that in order to…return inflation to that 2% target in a sustainable manner, there may need to be some adjustment of interest rates in the coming months.
Now, we will take that decision based on the data. I guess that possibility has definitely increased’.
While late in the day on Thursday, Carney’s remarks still created another Pound to US Dollar rally; Sterling also traded highly against most other peers.
While this news had already pushed the Pound up significantly, it was not the last source of support. While he had not backed interest rates during Thursday’s meeting, BoE official Gertjan Vlieghe nonetheless said;
‘Until recently, I thought the appropriate response of monetary policy was to be patient, given modest growth and subdued underlying inflationary pressure. But the evolution of the data is increasingly suggesting that we are approaching the moment when bank rate may need to rise’.
US Dollar Unsettled by Continued North Korean Aggression
While the Pound had a clear advantage at the end of last week, the US Dollar had no such luck.
In addition to falling consumer confidence and retail sales, there were also fresh concerns about North Korea.
Less than three weeks after launching an initial missile over Japan, the country send another piece of ordinance over the country, triggering missile attack drills.
The missile crashed into the sea after passing over Hokkaido, but the US and Japan were quick to condemn the provocation.
Problematically, however, there was uncertainty about how to actually resolve the issue without military intervention. US officials asked China to ‘rein in’ its southern neighbour, but Chinese diplomats criticised the US for ‘washing its hands’ of the issue.
North Korea also threatened to ‘sink’ Japan and turn the US to ‘ashes’, which did little to resolve the now-boiling tensions in the North Pacific.
This Week’s UK/US Economic Events: Carney Speech and Fed Meeting
The week’s first piece of economic news to watch out for will come as early as Monday and may affect the Pound.
This will be a speech from Bank of England (BoE) Governor Mark Carney, following on from last-week’s volatility inspiring remarks.
Carney is speaking at an International Monetary Fund (IMF) event in Rome, which could stray onto the subject of interest rates.
Although Carney would effectively be going over old ground by backing higher UK interest rates, such sentiment could reassure traders and boost the Pound.
This week’s big US news will come on Wednesday, when the Federal Reserve makes its September interest rate decision.
The Fed is not expected to touch interest rates, but could give a cautious outlook due to recent mixed US data.
There are some who think that a December interest rate is on the cards, so any signs that this might not happen could devalue the US Dollar.