A brief spike this morning saw GBP/USD climb to $1.5686, however the pound was unable to sustain the gains as the U.S dollar strengthened for the third consecutive day. The currency pair dropped over a cent during today's session, falling to a low of $1.5580 as traders continue to focus on a Federal Reserve rate hike.
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Why is the dollar strengthening?
After the People's Bank of China (PBOC) unexpectedly devalued its currency last week, the dollar dropped across the board amid concerns over a potential currency war. The move by the PBOC dampened expectations the Federal Reserve would raise its benchmark rate next month.
However, today saw China's central bank set the yuan above its fixing rate last Friday which cooled fears the PBOC would continue to reduce the yuan's value. Coupled with a positive report from the National Association of Home Builders this afternoon, it seems a rate hike by the Federal Reserve in September is back on the cards.
What to look out for this week.
Investors will be now switch their attention to Wednesday's U.S. inflation reading and the minutes from the latest Federal Reserve policy meeting. Both will be monitored closely as they could provide an insight to when the Fed is likely to act.
Tomorrow will see the UK's latest inflation reading which could also have a bearing on the GBP/USD cross. The forecast is for the inflation to remain a 0% but any deviation from the expected reading is likely to impact the value of the pound.
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