The pound has managed to put ongoing Brexit and political uncertainties behind it as it finally responded to the domestic economic news. On Tuesday we found out that the UK CPI inflation unexpectedly climbed to 3.1% y/y in November; a day later the three-month average of earnings came in at a good 2.5% compared to a year ago period, while today saw November retail sales easily beat expectations with a print of 1.1% m/m. With UK data coming in ahead of expectations, will the Bank of England respond by delivering a more hawkish policy statement today? Virtually everyone expects the Bank to keep its monetary policy unchanged but will there be any dissenters? If so, this could send the British pound/U.S. dollar (GBP/USD) currency pair surging higher. In contrast, if the central bank turns out to be unjustifiably dovish then sterling could get pounded. Heading into the rate decision at 12:00 GMT, we maintain our bullish view on the cable.
Meanwhile, the dollar will remain in focus after the Fed raised interest rates in a move that came as surprise to absolutely no one. We mentioned yesterday that the 25 basis point rate hike was already priced in and that the dollar may actually fall, and so it proved. Still, there were a few takeaway points from the FOMC. For example, the central bank chose not to change its language about inflation in the policy statement, which it says remains low. Meanwhile, the two dissenters in favor of leaving interest rates unchanged will both be non-voters for the next two years. What’s more, the "dot plot" of Fed officials' expectations for interest rates moving forward showed that the median Fed official still expects three rather than four interest rate hikes in 2018. So, overall the Fed's decision was in-line with market expectations although the central bank did come across a bit dovish which is why the dollar fell.
The dollar could extend its falls in the event US retail sales come in weaker later this afternoon. Economists are feeling somewhat bullish as they expect the headline figure to come in around 0.6% month-over-month and core sales to print 0.3% m/m. If expectations are met or bettered then the dollar may be rebound a little.
But as far as the GBP/USD is concerned, well it has now turned positive on the week after a weak start. So, the ranges might expand to the upside as those who sold earlier in the week rush to cover their positions. In addition, and as mentioned previously, the GBP/USD is bouncing off of a monthly support area, and the trend has been bullish this year – hence, why are bullish.
