Foreign Currency Market Update – GBP / USD Update
The Pound to US Dollar exchange rate succumbed to a new 17-month low last week as Bank of England rate hike bets continued to deteriorate.
Following on from a soft manufacturing PMI report, Markit Economics confirmed that construction output decelerated from 59.4 to a 17-month low of 57.6 in December on Monday. The disappointing result helped drive GBP/USD down from 1.5300 to 1.5250.
And Sterling’s woes didn’t end there. During Tuesday’s session Markit announced that Britain’s dominant services industry – which accounts for over 70% of UK GDP – performed at its worst level for 19 months in December. The downbeat report sent ‘Cable’ spiralling even lower to 1.5150. American data also disappointed analysts’ forecasts, with Markit’s manufacturing PMI slowing from 56.2 to 53.3, but traders did not punish the ‘Greenback’ because most other economic indicators were seen to point towards an early rise in rates from the Federal Reserve.
The Pound stabilised against the US Dollar on Wednesday evening in response to the latest Fed minutes report. The US central bank sounded a slightly less hawkish tone than many traders had expected, indicating that rates would likely remain at rock-bottom levels until at least the end of April.
However, negative technical sentiment took GBP/USD down to a new 17-month low of 1.5035 on Thursday morning. The Bank of England’s decision to leave rates on hold at 0.50% was absolutely anticipated, and had little-to-no effect on the value of Sterling.
The Pound ticked higher on Friday morning thanks to a better-than-anticipated UK manufacturing production print of 0.7% and an encouraging drop in the budget deficit from -£9.8 billion to -£8.8 billion due to falling oil prices. Sterling strengthened further in the afternoon, rising to 1.5150, as the latest US non-farm payroll report conveyed mixed signals with regards to the health of the American jobs market.
Unemployment fell to a new six-year low of 5.6% and payrolls increased by an above-target 252,000. But demand for the ‘Greenback’ was curtailed by news that both participation and average hourly wages dropped -0.2%. The mixed bag of data was seen to suggest that rates could remain low for a little bit longer than initially forecast.
With British inflation set to fall to 0.7% on Tuesday, thus prompting Governor Carney to write a letter to Chancellor Osborne explaining why price pressures are under half the bank’s 2.0% target, it is unlikely that we will see a rate hike from the Bank of England anytime soon. This means that GBP/USD could struggle to hold above 1.5000 as we approach May’s general election. US data is forecast to print rather meekly this week, but if inflation or retail sales outperform analysts’ expectations then we could see Sterling fall below psychological support sooner rather than later.
Heads Up
Summary of major upcoming data releases that we think may move the market.