Over the last 48 hours Sterling has managed to claw back the losses it sustained on Friday afternoon following comments from Bank of England (BoE) governor Mark Carney. GBP/USD exchange rates hit a peak today of $1.6621, meaning the cross has gained around 1% since trading closed on Friday.
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So why has Sterling recovered?
Quite simply it is down to the strength of the UK economy and the vulnerability of the U.S. economy. Sterling suffered last week as Mr Carney began to talk down the pound in an attempt to boost UK exports. The BoE are concerned that the UK's recovery is going to hinder UK businesses as products start to become more expensive as the pound continues to grow in value.
It did not take long for the pound to shake last weeks comments as the provisional figures for Q4 GDP were released this morning and came in exactly as forecast. This is excellent news for the UK economy as it shows the recovery is moving inline with analyst predictions.
Across the pond is a different story however, yesterdays New Home Sales missed the predicted figure by 43,000. This latest number highlights the issues the Federal Reserve (FED) currently face as they attempt to boost a flagging economy. It may also have an effect on their plans to cut back the on-going stimulus programme.
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Last month the FED announced they will trim the $85 billion they are currently being pumping in the U.S. economy by $10 billion. There had been hopes that future improvements in the economy would allow another cut back when FED officials meet later this week.
Unfortunately for the FED, since tapering was announced in December the U.S. has had a string of poor data releases and in certain circles there has even been talk that we could see the FED unwind part or all off the recent cutback, pushing the stimulus package back to $85 billion per month.
Although unlikely, it can't be completely ruled out and if it were to happen the result could be disastrous for the value of the dollar. Only last week we saw GBP/USD sitting at its highest level for 2 and half years ($1.6664) and if the FED do decide to increase the stimulus payment it is possible we could see GBP/USD exchange rates push to a fresh high.But lets not get to carried away, Mr Carney is due to give another speech tomorrow and it gives the BoE governor another opportunity to try and talk down the pound. It looks as though the rest of the week could provide some volatility for GBP/USD and I of course will look to keep you posted of any major developments.
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