The USD weakened across the board early in the week to the point at which GBP/USD traded to an over 5-year high. Furthermore, UK data was again impressive this week – Services PMI on Tuesday printed better than expected at 58.7 vs. 57.9 , giving cable a further boost.
Fed Chair Yellen testified before the Joint Economic Committee of Congress later in the week, but didn’t say anything that took markets by surprise – a high degree of accommodation was still needed, the pickup in the labour market continued being slow, and that the low rate of inflation could cause issues. On a positive note, she told Congress that the economy was growing at a decent rate and was shaking off the effects of bad winter weather, with rebounds in spending and production being well underway.
By Alex Edwards at UKForex, an international money transfer service
As widely expected, the Bank of England left monetary policy unchanged on Thursday. However, the economic indicators continue to show that the UK economy is well on its way to recovery. Although there may still be an ongoing debate among MPC members over the degree of spare capacity, these improving fundamentals will be difficult to ignore for the central bank and markets are increasingly pricing in a rate hike as early as December or January. GBP/USD is holding firm above 1.69, as the week is coming to a close.
The ECB left monetary policy unchanged on Thursday, too. In his press conference, Mario Draghi started by saying that the bank saw neither downside nor upside risks to inflation, which sounded as though he would be toeing the same line as previously in recent meetings.
EUR/USD was bid higher and it looked at one point as though it would break 1.40. However, President Draghi then went on to say that the ECB stood ready to act on monetary policy in June and that the high value of the euro along with the impact of low inflation would have to be addressed, as it was a serious concern to ECB members.
It does of course mean that June’s announcement will not be a run-of-the mill affair, as it looks increasingly likely that the central bank will act either to cut rates or implement some other type of monetary policy tool, should Flash EZ CPI on June 3rd or associated inflation figures print lower again. This is unless Draghi is bluffing a little and was taking a good opportunity to talk down the value of the euro – perhaps a bit of both. The 1.40 level now looks much further away though – EUR/USD fell to a low of 1.3825 and then continued lower after snapping lower by approximately 140 points immediately after Draghi’s presser.
Further reading: Could EURUSD Be The Trade Of The Year?
Next week is a big week for the pound. Employment data, the BoE’s inflation report and a speech by Governor Carney are all due on Wednesday. If we’re going to see GBP/USD break 1.70, this could well be the day – but as it is a psychologically resistant level, it may not come easy, and will perhaps prove too difficult to break at this moment. US CPI is also due later in the week and Fed Chair Yellen is again due to speak on Friday.
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