Foreign Currency Market Update – GBP / USD Update
The Pound tumbled by three cents last week to a fresh 17-month low against the US Dollar as soft UK manufacturing output weighed on Bank of England rate hike bets.
Data was fairly thin on the ground last week, meaning that GBP/USD meandered between 1.5500 to 1.5600 from Monday to Thursday. However, the Pound suffered a sharp decline on Friday morning when British manufacturing data printed surprisingly badly. The PMI index came in at 52.5, confounding expectations of 53.6, as sub indexes for new order, output and employment all softened. By the end of the day Sterling had depreciated to 1.5333.
And the Pound’s weakness continued when markets reopened for trading earlier this morning: GBP/USD is currently hovering just above 1.5200 due to a worse-than-expected UK construction PMI result of 57.6, down from 59.4 previously.
Apart from the diverging rate outlooks of the Bank of England and the Federal Reserve – analysts anticipate a rate hike from the Fed in the first half, possibly the first quarter, of 2015 whereas the BoE seems poised to wait until 2016 to start tightening monetary policy – the Pound is also suffering at the hands of jittery investors who fear that May’s general election could compromise Britain’s position within the European Union.
In an attempt to win back support from far-right Tories who have been flirting with the idea of defecting to UKIP – some have even made the switch – David Cameron has promised an in-out EU referendum if his conservative government wins a second term in parliament. The fear is that a referendum of this kind could deter future business investment in the UK due to the economic uncertainty that it could cause.
Looking ahead at the economic calendar, it’s difficult to see Sterling clawing back any ground against the US Dollar this week.
If Tuesday’s UK service sector PMI report performs as badly as the construction and manufacturing reports then demand for the Pound could diminish further, and Thursday’s BoE interest rate decision is almost certainly not going to yield a surprise rate hike.
US data looks slightly more promising. Wednesday’s Fed minutes report could give more clues as to when the world’s most powerful central bank intends to start raising rates and Friday’s US non-farm payrolls report is tipped to print sanguinely at 243,000, which is likely to bring the US unemployment rate down to a fresh six-year low of 5.7%.
Heads Up
Summary of major upcoming data releases that we think may move the market.