FX Outlook: Pound (GBP) Higher against Peers Thanks to Positive Interest Rate Comments

On Monday the Pound gained on the US Dollar thanks to unexpectedly bullish interest rate remarks from a Bank of England (BoE) official. Last week the GBP/USD pairing fell to an 18-month low as the minutes from the latest BoE meeting showed that policymakers were united in voting for interest rates to hold at record lows in the face of declining inflation and falling commodity prices. The Pound failed to recover against the US Dollar even as the UK’s retail sales report surprised to the upside on Friday. However, Sterling advanced on its North American counterpart for the first time in four days on Monday after BoE policymaker Kristen Forbes asserted that UK borrowing costs could be increased sooner than currently projected if the rate of inflation picks up and the global economic outlook improves.

According to strategist Kamal Sharma; ‘We should see some stabilisation and perhaps some scope for Sterling to move higher in the near term. The BoE has expressed some concern in the past about the extent to which UK rate-hike expectations have been pushed back into 2016. That’s fairly consistent with the Forbes comments that market may be overly complacent on the timing of the first UK rate hike.’

However, while the Pound advanced by 0.5% against the US Dollar over the course of the European session, it was trading in a narrow range against the Euro after paring its Greek-election inspired gains. The Euro recovered losses against several of its most-traded currency counterparts as investors revised their expectations regarding a potential Greek exit from the Eurozone (Grexit) and Germany published better-than-forecast business conditions/climate data. Tomorrow the UK will be publishing its fourth quarter growth data, and the figure has the potential to cause movement in both the Pound/US Dollar and Pound/Euro currency pairs. If the pace of growth in the UK is shown to have slowed by more-than-expected, Sterling will be pressured. Of course, investors with an interest in the GBP/USD exchange rate will also be taking an interest in the US Durable Goods orders figures, scheduled for release at 13:30 and looking ahead to the nation’s own growth data – set for publication on Friday. The US economy is believed to have expanded by 3.1% on an annualised basis in the fourth quarter of the year – down from the 5.0% figure recorded in the third quarter. The final University of Michigan Confidence index is also scheduled for publication on Friday and is expected to remain unrevised from the initial estimate of 98.2.