What Prompted the British Pound’s Fall
The British pound and the Bank of England
The British pound (FXB) depreciated by 2.0% against the US dollar (UUP) in the week ended February 9. The pound (GBB) ended the week at 1.38, against its post-Brexit high of 1.44 in January. This fall comes as a surprise because the Bank of England, in its monetary policy statement and quarterly inflation report, sounded hawkish about the economy. The British central bank upgraded its economic outlook for the United Kingdom for 2018 and 2019 and indicated that interest rates should be increased faster than expected. The reason for the tepid performance of the British pound was weaker-than-expected economic data indicating lower industrial production and trade activity, and risk-off trading boosting demand for the US dollar.
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Speculators decrease bullish positions
According to the Chicago Futures Trading Commission’s Commitment of Traders report for last week, speculators have trimmed their overall bullish positions by 1,300 contracts. There were 27,867 outstanding net long contracts, compared with 31,741 contracts the week before.
The week ahead for the British pound
This week’s economic data releases from the United Kingdom include inflation and retail sales figures for January. The depreciating pound has boosted UK inflation, especially imported energy inflation. The last report indicated that UK inflation stood at 3.0% in December. The Bank of England expects inflation to reach 2% earlier than expected, supported by a higher British pound and an improving economy. In the final part of this series, we’ll analyze demand for the Japanese yen in the last two weeks.