It’s been a good week for the British Pound (GBP) against the dollar. After a brief dip to near three-week lows on Thursday, the currency has bounced back above the $1.20 level and is on track to reach its highest level in more than three months. The currency has also broken above the psychological level of 1.2000. In the short-term, the pair is expected to continue moving upwards. However, the upcoming jobs report and UK CPI inflation could affect the pound’s outlook.
The UK economy’s growth is set to slow in the third quarter. However, the UK government unveiled a spending plan on Monday that hints at the possibility of higher inflation. That would help boost confidence in the domestic economy. This could also drive up the pound’s bond yields, thus giving the currency more support.
The pound’s latest GBP/USD push has come on the back of upbeat employment figures. The pound saw 55K new jobs created in the month, surpassing expectations and coming in below the 60K mark. With a unemployment rate of 5.0 percent, the figure is the lowest in more than a decade. A rise in the number of job seekers will stoke inflation, and may contribute to a more forceful response from the Bank of England (BoE) to push up interest rates.
On Wednesday, the BoE will announce its interest rate decision, which will affect the direction of the pound. As well as the interest rate, the Bank of England will also provide forward guidance. Those guidance signals may be less aggressive than some are expecting. Although the hawkish outlook for the currency was expected, softer economic data has increased the likelihood of a more cautious move from the central bank.
Traders should also take a look at the UK CPI number, as the higher reading is the likely indicator of a pick up in wage growth. Though the higher figure isn’t necessarily a sign of a big jump in prices, it’s an important number to watch, as it can help determine how far the pound can rise before being capped by rising borrowing costs.
The pound’s recent surge against the US dollar has been based on a wide range of factors. Some analysts have said the resurgent risk appetite is the major driver. Other macro factors, including a decline in energy prices, are also playing a role. Regardless of the specifics, it’s clear the pound underperforms when global and domestic risk sentiment are weak.
Another factor that might be playing a part in the underperformance of the pound is the decline in housing affordability. Though the housing market has improved, it’s still below its pre-recession levels. Furthermore, the pound has yet to make its climb above the level of parity with the US dollar.
Meanwhile, the UK CPI rate, which clocked in at 10.5% in December, is below the 41-year high of 12.5% in October, and will likely be the driving factor behind any further hikes from the BoE. While the inflation rate might not be the best number to monitor, it should be noted that it is the largest monthly increase in nearly a year.
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