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The pound is currently at around $1.3742 against the US dollar, almost flat from morning’s starting levels but up by almost two cents from Friday’s opening.
A lot of focus is likely to be put on tomorrow’s CPI figures after inflation struck a five-year high of 3.1 per cent in November, despite the Bank of England’s (BoE) raising of interest rates.
Economists currently forecast that inflation will have dipped back to 3 per cent when figures are released for last month.
This may dent the pound on Tuesday, if investors feel that any dip in inflation relieves some of the pressure on the BoE and makes it less likely to further raise interest rates this year.
However the figures may instead lift GBP if markets consider the drop as helping close the gap between inflation and wage growth.
This may help consumer spending rebound over the coming months and help to shore up UK growth.
At the same time the US dollar continues to weaken at the start of this week’s session as markets become increasingly dovish towards the currency in what is apparently becoming a trend in 2018.
Investors have increasingly shied away from the US dollar in recent months as monetary tightening is no longer seen as the sole realm of the Federal Reserve.
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The likelihood of monetary tightening from other developed economies has resulted in further US dollar weakness
Richard Hunter, head of markets at Interactive Investor said: “The likelihood of monetary tightening from other developed economies has resulted in further US dollar weakness, an early investment theme for the new year.”
In fact USD investors are becoming increasingly sceptical over whether the Fed will manage to maintain its current pace of monetary tightening over the coming year.
It comes as stubbornly low US inflation makes many policymakers reconsider their stance on hiking rates in 2018.
Looking ahead, the main focus for Sterling investors this week will be tomorrow’s inflation figures.
However the GBP/USD exchange rate may see some gains with the release of US data later this afternoon.
The US will publish its latest Empire State Manufacturing Index today, with a possible dip in factory activity across New York State likely to weaken the US dollar.
