Foreign Currency Market Update – GBP / USD Update
The Pound to US Dollar exchange rate hovered close to 17-month lows for most of last week’s session due to the growing opinion among speculators that the Federal Reserve will start raising interest rates around six months sooner than the Bank of England.
Fed policymaker Dennis Lockhart made the case for tighter monetary policy last Monday, commenting that the US economy is ‘hitting on all cylinders’ and could cope with higher interest rates even if inflation remains below target. The remarks had only a mildly positive impact on demand for the ‘Greenback’.
On Tuesday British inflation came in at 0.5%, underwhelming expectations of 0.7%. This is the lowest CPI score in the UK since the year 2000 and means that BoE Governor Mark Carney now has to write a letter to Chancellor George Osborne explaining why price pressures are less than half as strong as the bank’s 2.0% target. With global oil prices at five-year lows, the letter looks set to be fairly self-explanatory. Indeed, Osborne himself has already cheered the reduction in inflationary pressures as ‘welcome news for Britain’s households’ and is unlikely to demand a change in monetary policy.
With core consumer prices still rising at a rate of 1.3%, investors did not deem it necessary to punish the Pound for the oil related dip in the headline inflation index.
Sterling rallied to a weekly high of 1.5260 on Wednesday when a softer-than-anticipated US retail sales report applied some downward pressure on the ‘Greenback’. Data showed that over the key Christmas shopping period, private consumption was -0.9% lower in 2014 than during the same period in 2013. Markets had been primed for a much smaller decline of -0.1%.
In reaction to the Swiss National Bank’s decision to remove its 1.20 CHF/EUR floor, the US Dollar managed to appreciate across the board on safe haven flows. This helped the world’s premier business currency strengthen by around 0.7 cents against Sterling.
On Friday US inflation came in at a five-year low of 0.8% but the report had little impact on the ‘Greenback’ because it was largely a result of the recent capitulation in crude oil.
Looking ahead, the economic docket appears to support a stronger GBP/USD rate this week. The most important thing to look out for is the latest UK labour market report, due for release on Wednesday morning. The headline unemployment rate is tipped to plunge to a new six-year low and average wages look likely to increase from 1.4% to 1.7%, which should give Sterling a boost as BoE rate hike expectations improve.
However, the ECB looks set to embark on a full-scale asset purchasing programme on Thursday, which has the potential to drive investors across the Atlantic into the US Dollar and could therefore prevent the Pound from registering any protracted gains.
Heads Up
Summary of major upcoming data releases that we think may move the market.