Pound In For Big Test Tomorrow

The pound is in recovery mode today after strong local data out of the UK provided a much needed boost for the currency, but the party may be short lived as the market gears up for tomorrows interest rate decision from the US Federal Reserve and a possible leadership battle in the British parliament.

At 7.38pm (GMT) the British currency was trading at $1.2763 up from $1.2674 in yesterday’s close.

Headline inflation in the UK rose 2.9 percent year on year, marking its highest level in 4 years, and was mainly attributed to the falling pound of the back of Brexit.

The figures may have gone someway to helping the pound but wage growth, which was also reported, rose 2 percent which means against inflation, real wages are falling, which in the long term is going to hurt British consumers.

In the coming days, political turmoil is going to create volatility in the pound as Prime Minister Theresa May attempts to form a coalition government which until now is proving difficult and some say is too late, and it’s only a matter of time before she resigns,

Brown Brothers Harriman currency analysts, led by Marc Chandler, said:

There is great uncertainty whether May survives as prime minister, but it is not clear either who would replace her and if they have greater support about the Tory base.

Tomorrow is also a big test as the US Fed gears up to raise interest rates with the market predicting a rate rise of 25 basis points as a foregone conclusion that is already priced into the market so all eyes will be on the following monetary statement.

If the speech is bullish, analysts predict further rate rises this year and the pound is likely to give up today’s gains and then some,

Mihir Kapadia, CEO of Sun Global Investments, said:

The Fed is likely to hike the interest rates further in the two-day meeting, but investors want to understand the Fed’s perception of the U.S. economy and whether it feels it is robust enough to mandate a future increases through 2017 as proposed earlier.

Higher interest rates would shift balance of market demand to the dollar.

This would be terrible news for the pound, he added.

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