Pound Dollar Exchange Rate Surges on US Retail Sales Flop

Carney sends pound sterling higher

Above: BoE Governor Mark Carney hinted at potential rate hikes in 2015.

The pound neared six-week highs against the dollar after the BOE’s quarterly inflation report largely left intact expectations it could boost rates on the early end of next year.

With a slew of global central banks cutting back on interest rates and introducing quantitative easing simply mentioning future interest rate rises is enough to attract the hot money.

The pound was able to put the boot into the US dollar further after US January retail sales fell more than expected.

At the time of writing we see the pound to dollar exchange rate (GBP/USD) is trading nearly a full percentage point higher having reached 1.5380.

As the below indicates, the outlook for sterling-dollar has improved considerably with a bottom to the 2014-2015 declines having been established it would seem:

pound to dollar bottoms out

“Sterling is closer to digging out of its 2015 hole against the greenback after a key inflation report from the Bank of England (BOE) wasn’t considered a game changer for the interest rate outlook in Britain,” says Joe Manimbo at Western Union.

The bank warned that inflation risks slipping below zero in the months ahead.

Still, Governor Mark Carney doesn’t expect deflation to take hold.

The BOE raised its growth forecast for the coming years and anticipates inflation returning to its 2 percent goal in two years’ time.

“U.S. importers are now at risk of paying higher costs for GBP payments over the short run following the pound’s resilient performance. With the pound still in the red on the year against the dollar, the current market remains attractive for customers to reduce exposure with forward contracts,” says Manimbo.

Forecast for GBP to USD Exchange Rate

Turning to the charts for guidance on future direction in the pound dollar exchange rate, Luc Luyet, technical analyst at Swissquote Research tells us:

“GBP/USD has broken the key resistance at 1.5274 (06/01/2015 high). Even if the declining trendline remains thus far intact, further strength towards the resistance at 1.5486 is favoured. Hourly supports stand at 1.5197 (10/02/2015 low) and 1.5139 (04/02/2015 low). An hourly resistance can be found at 1.5352 (06/02/2015 high).

“In the longer term, the break of the key resistance at 1.5274 (06/01/2015 high) suggests renewed buying interest.

“Upside potential are likely given by the resistances at 1.5620 (31/12/2014 high) and 1.5826 (27/11/2014 high). The strong support at 1.4814 should cap the medium-term downside risks.”

US January retail sales fell more than expected

 Retail sales fell more than expected in January 2015 by posting a monthly decline of 0.8%.

January’s decline was largely attributable to lower sales at gasoline stations (-9.3%) and motor vehicle dealerships (-0.5%).

 Control retail sales, which exclude sales at auto dealerships, gasoline stations, and building material stores, inched upward by a smaller than expected 0.1% following a revised 0.3% pullback in December 2014 (was -0.4%).

US initial claims rose more than expected to 304,000 in the week ending February 7, 2015 from a revised 279,000 (was 278,000) level for the previous week.

“The persistent improvement in labour market conditions and indications that core inflation pressures are not easing set up for the Fed to start the process of returning monetary policy to normal conditions late in the second quarter of 2015, even if the economy’s growth rate does not accelerate materially from the fourth quarter’s pace,” says Dawn Desjardins, Assistant Chief Economist at RBC Economics.

To that end, RBC continue to expect the Fed will implement a 25 basis point hike in the fed funds target in June 2015.