Pound to US Dollar Exchange Rate Forecast: Domestic strength in the UK economy has allowed Sterling to reach a 4-month high against the US Dollar

Domestic strength in the UK economy has allowed Sterling to reach a 4-month high against the US Dollar.Domestic strength in the UK economy has allowed Sterling to reach a 4-month high against the US Dollar.

Foreign Currency Market Update – GBP / USD Update

As markets gear up for a return to the Fed’s easing cycle, domestic strength in the UK economy has allowed Sterling to reach a 4-month high against the US Dollar.

The Pound to US Dollar exchange rate stood at 1.5851 at the beginning of last week, and appreciated by around 0.3 cents on Monday as the UK Manufacturing PMI came in better-than-expected at 49.5. On Tuesday the Sterling / US Dollar rate reached 1.5909 as a leaked Services PMI report reflected positively on the UK economy – the Service sector improved from 51.0 to an impressive 53.7.

On Wednesday details regarding the European Central Bank’s bond-buying programme, which aims to bring down the yield on sovereign debt for struggling Eurozone economies, were released 24 hours ahead of schedule. The leaked report showed that the ECB would not hold seniority on the bonds – meaning that they would not be first in the pecking order for repayment – and suggested that bond purchases would not be inflationary – something the Germans are vehemently wary of – owning to the fact that the exact amount of money pumped into the sovereign debt market would be suitably removed from somewhere else. Subsequently the Pound appreciated against the US Dollar as global risk appetite took the Sterling currency higher.

The ECB confirmed the details contained in the leaked report on Thursday and as a result the Pound grew by a further 0.4 cents, once again in response to a pick-up in worldwide risk sentiment. The Pound was also supported by the news that the Bank of England had decided to leave interest rates unchanged at 0.50% and maintain their current asset purchasing target of £375 billion.

The UK Central Bank’s recent inclination to remain on the sidelines has allowed the Pound to mount a 5-cent rally over the past month, and Sterling’s performance hit terminal velocity on Friday as the US Non-farm Payrolls figure disappointed analysts’ expectations and greatly increased the likelihood of a return to the Fed’s easing cycle. The US Non-farm Payroll figures printed at 96,000 compared to predictions of a slightly better 130,000. In response Sterling rose up through resistance levels and reached a 4-month high of 1.6034.

Over the coming week the economic docket looks fairly straight forward for both currencies, with the main market-moving influence likely to be derided from the Federal Open Market Committee’s press conference on Thursday. If the FOMC opt for a new, global growth-inducing, set of asset purchases then the Pound could feasibly post another impressive set of gains versus the US Dollar.

However a reversal in fortunes remains a possibility for Sterling as the ECB’s bond-buying scheme has not yet passed the German Constitutional Court. The German vote takes place on Wednesday and could hold the key to GBP/USD’s prospective direction.

If the Fed elect to embark on a third round of asset purchases and the ECB obtain ratification from Germany then it is entirely possible that the Pound could push towards resistance levels at 1.6140, and if this barrier is broken the next key resistance lies at April’s high of 1.6300.

Heads Up

Summary of major upcoming data releases that we think may move the market.

 

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