GBP/USD: Pound Holds $1.3050 On Expansionary Fiscal Policy Hopes

The pound powered higher for the fourth straight session on Thursday. The pound US dollar exchange rate pushed through the key psychological US$1.30 level, to reach a peak and 6 day high of US$1.3070.

The pound is consolidating those gains in early trade on Friday. Th pound has increased 1.1% across the week to date, paring some of the 2% losses from the start of February.

Pound: Johnson’s cabinet reshuffle resulted in a surprise resignation from Sajid Javid

Boris Johnson’s cabinet reshuffle resulted in a surprise resignation from the Chancellor of the Exchequer, Sajid Javid. Whilst the pound’s initial reaction was to fall, it quickly recouped the losses and surged northwards on the announcement that Sajid Javid’s second in command at the Treasury, Rishi Sunak would be filling his position.

The pound surged because Rishi Sunak, a former hedge fund manager, is considered to be more business friendly, more malleable and more likely to agree to Boris Johnson’s big spending plans. Sajid Javid was more Conservative on fiscal policy and Boris Johnson has made it clear that he is looking to spend hard through Brexit to boost the UK economy.

An expansionary fiscal policy could convince the Bank of England to hold off on interest rate cuts for the next few quarters. As a result, the pound rallied.

Whilst domestic politics are boosting the pound, any gains will be capped by no trade deal Brexit fears.

Dollar traded broadly flat versus its peers after a mixed inflation reading in the previous session

Consumer prices edged up 0.1% month on month in January. This was the smallest increase in inflation in 4 months and was below the 0.2% analysts forecast. Meanwhile on an annual basis the cost of living increased to 2.5%, in line with expectations and above December’s 2.3%. Core inflation which strips out volatile items such as food and fuel was flat at 2.3% for the fifth straight month, slightly ahead of the Fed’s 2% target.

However it is worth keeping in mind that the Fed’s preferred measure of inflation, the PCE is still only at 1.6% increase year on year. With this in mind the Fed are unlikely to move on rates any time soon.

Today is another busy day for US data. US retail sales, industrial production and consumer confidence figures are all due for release.

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