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GBP finally shows some strength

GBP finally shows some strength

Despite yesterday’s data from the eurozone, showing it had officially emerged from recession, Sterling is gaining momentum after the upbeat data from the UK retail sales during July. GBP/EUR has now comfortably broken the 1.1700 mark.

Only two weeks ago there was significant belief that GBP/USD would dip below the 1.5000 mark. After a big week for GBP, seeing it appreciate to 1.5500 versus USD, what has happened to this belief?

USD strength over the past month has been based on expectations that the Federal Reserve will be reducing the amount of stimulus/money that it is putting into the economy. This has been referred to as ‘tapering’ – presumably because they will be tapering off the stimulus. Many market participants expected tapering to begin in September – as the calendar month approaches, speculation has run rampant as to when and more importantly if the Federal Reserve will begin its initiative to scale back bond buying purchases, now tallied at $85 billion per month.

Ultimately however, the Fed needs to ascertain more evidence that the US economy is tangibly improving and that inflation is heading higher . As such this gives GBP/USD scope to move higher in the next 4 to 5 weeks.

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