Pound v Dollar Outlook Positive as Inflation Rises Once More

While the main focus of currency markets will be on the U.S. dollar this week there are some important data points that will drive interest in the British pound.  

On Tuesday the 16th June the release of the previous month's inflation data saw the pound sterling fall despite indications that UK inflation is starting to rise once more. 

A reading of 1% was delivered - in line with expectations but higher than the previous reading that saw prices fall -0.1%.

While the pound to dollar exchange rate (GBP/USD) traded lower on the release hitting 1.5574 we note momentum still remains positive with the pair extending a multi-day rally.

Can the move higher continue? As we note here, the chances for a test of the best exchange rate of 2015 remains on course when technical factors are taken into consideration.

However, the achievement of such highs will also depend on fundamental data and the central bank.

The Bank of England will release the minutes from their June monetary policy meeting mid-week and currency markets will react by buying sterling if more members of the Bank’s MPC were shown to have voted for an interest rate rise.

This would signal that we are approaching that first pro-GBP hike in rates.

“Given that data was mixed going into the rate decision, chances are policymakers will remain divided on whether rates need to be increased this year. While they may be undecided, UK inflation, employment and retail sales data will help investors solidify their expectations,” suggests trader Kathy Lien from BK Asset Management.

Note that currency quotes in this piece refer to the inter-bank market, your bank will then subject a spread when offering you their retail rate for international payments. However, an independent currency provider will seek to get closer to the market, this can result in up to 5% more currency can be achieved in some instances.

What to Watch for Pound / Dollar in the Week Ahead

Looking at the UK economic agenda there are a few heavy-hitting data points to watch:

1. Inflation (Tues 16 June): Markets are looking for inflation to rebound from -0.1% Y/Y in April to +0.1% Y/Y in May. Analysts at TD Securities are even more bullish at 0.3%. “Inflation readings have been stronger than expected across most of Europe in May, and the rebound in fuel prices should also be a key driver,” says TD’s Jacqui Douglas.

2. Employment (Wed 17 June): Markets look for the unemployment rate to remain unchanged at 5.5% in Apri. The claimant count is predicted to read at -12.5K while Average Earnings with Bonus data are seen to have grown by 2.1%, up from 1.9%.

Remember this is the day the MPC minutes are released.

3. Retail Sales (Thurs 18 June): Analysts are looking for UK retail sales to pull back in May after the huge 1.2% gain the month before. A reading of 0.2% is predicted.

“We think that we’ll see around a -0.5% decline which would disappoint consensus, as the weather turned colder and fuel prices rebounded, as consumers put the brakes on their recent spending sprees,” says Douglas.

FOMC - the Big Event

The USD in the most part has pulled back into a range since failing to extend on the stronger than expected employment numbers at the beginning of the month.

Eventhe strong retail sales print last week couldn’t see broader buying interest develop, it seems currency traders need much stronger data to convince the USD to move back into its underlying trend and set new highs.

The US side of the equation will arguably be more important though with a much-watched Federal Reserve decision on rates due on Wednesday.

The U.S. dollar may be struggling against the pound sterling but is riding high against other currencies heading into next week's Federal Reserve meeting.

The U.S. economy is gaining momentum after a slowdown in the first quarter and according to the latest economic reports, producer prices and consumer sentiment as measured by the University of Michigan index is on the rise. 

This is on top of the increase in wages, improvement in job growth and pickup in retail sales. All of these reports harden the case for liftoff.

With this bullish sentiment on the USD we see gains in sterling-dollar being capped. Strength should ultimately fade at the resistance area seen at 1.58.

Anything above 1.550 should be considered strong levels to buy dollars with sterling.