All trading involves risk. Losses can exceed deposits.
Over 40 years’ heritage
Over 185,000 clients worldwide
Over 15,000 markets

Where now for the pound?

After a strong run, sterling appears to be due a bout of weakness versus the US dollar

All trading involves risk. Losses can exceed deposits.
Pound sterling
Source: Bloomberg

Today’s UK CPI figures should have been the catalyst for a rally in the pound against the dollar. Price growth, in both the headline and core numbers, came in ahead of expectations. But the response from GBP/USD was a tremendous shrug of the shoulders. Instead of pushing on to $1.30, the pair lost ground slightly.

Price action, as the saying goes, is the only indicator. It is true that we still have unemployment and wage data release tomorrow, and then retail sales on Thursday, before we have a fuller picture of the state of the UK economy. But the CPI number is the most important figure this week, and on today’s evidence it looks like we could be due a retracement in GBP/USD, if only as part of a wider uptrend.

The broadly uneventful reaction to article 50 notification, and the announcement of a snap general election, caught the market napping. The skies did not fall after the UK notified the European Union (EU) of its intent to leave, and then the election news confirmed (based on current polling), that Theresa May is to remain the UK’s Prime Minister for the next five years. This change in fundamental news caused a reassessment of the pound’s outlook, and a market that was still broadly short was forced to begin changing its view. Short positions were bought back, creating an upward momentum that soon gathered pace, and resulted in GBP/USD recovering some of the ground lost over the previous six months.

Now, all that is ‘in the price.’ The Bank of England (BoE) has already signaled that it will tread carefully where higher interest rates are concerned, even if inflation does run above target. This is in no small part due to concerns that the divorce negotiations with the EU will create significant uncertainty that will feed through to the broader economy, while weakness in wages means that UK consumer spending will remain constrained.

Longer-term, the path for GBP/USD appears higher, especially since the Federal Reserve may struggle to raise rates twice more this year, and this could boost USD weakness. By the end of 2017, $1.30 and higher is still eminently possible, but we could see the pair struggle over the summer, at least until the path of UK inflation becomes clearer. 

UK general election 2017

Theresa May has called for a snap election to take place on 8 June. What does this mean for the markets?

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by analysts

Education

  • Introduction to CFDs

    An introduction to CFD (Contracts for Difference) trading and how it works, featuring examples and reasons to trade CFDs. We also discuss the related pricing and funding requirements.

  • Dividends

    Without shares there could be no stock markets, which are vital to every national economy. Find out how the shares trade enables companies to expand and develop, while providing sources of income to private investors and larger funds.

  • Types of orders

    Learn the different ways you can open and close a position – from a simple, immediate trade to an automatic instruction to deal in your absence. Orders can help you lock in profits or guard against loss; get to know the various types and see how to use them.