Foreign Currency Market Update – GBP / USD Update
Sterling depreciated by around a cent against the US Dollar last week and briefly dipped below 1.5000 for the first time since July 2013.
GBP/USD got off to a quiet start last week, with US markets closed for Martin Luther King Jr. Day on Monday and no major ecostats released on Tuesday.
‘Cable’ declined to 1.5120 on Wednesday morning in reaction to a surprisingly dovish minutes report from the Bank of England. The minutes revealed that, after voting for a rate rise at each of the last five policy meetings, BoE officials Martin Weale and Ian McCafferty switched sides in January. Concerned by the climate of falling consumer prices due to the crude oil drop off, the former hawks retracted their rate hike bids, which was seen a bearish signal for the Pound. The British labour market report actually came in extremely positively: unemployment sunk to a fresh six-year low of 5.8% and wage growth overtook inflation to mark a 0.7% rise in real wages. But unfortunately the upbeat data was overshadowed by the BoE’s 9-0 vote against raising interest rates and Sterling did not receive a boost.
On Thursday demand for GBP/USD collapsed as markets reacted to the European Central Bank’s large-scale asset purchasing programme. The ECB QE scheme drove investors out of Europe and into the safe haven US Dollar and because EUR/USD is the most-traded currency pair on the market, this large flight of funds across the Atlantic also had an impact on the Pound to US Dollar exchange rate.
‘Cable’ tumbled to 1.5030 on Thursday evening and Sterling plunged below significant psychological support of 1.5000 on Friday. However, a sturdy 0.4% rise in UK retail sales, when a -0.7% contraction had been predicted, helped the Pound to reassert itself above the key 1.5000 handle.
Looking ahead at this week’s data stream and there are a few releases that could have an impact on GBP/USD.
The first ecostat to look out for is the fourth quarter UK GDP report, released on Tuesday morning. The market forecast suggests that British growth slowed from 0.7% to 0.6% in the final three months of 2014, which could hurt the Pound. Anything below 0.6% will almost certainly send Sterling back down below 1.5000.
The next key event of major significance is likely to be Wednesday evening’s Federal Reserve interest rate announcement. The Fed is widely anticipated to leave rates on hold at 0.25% but investors will be listening in with eager ears to find out whether the US central bank intends to push ahead with its mid-2015 rate hike plans even though most other major central banks are looking to loosen monetary policy. If Fed Chairwoman Janet Yellen continues to suggest that rates will rise over the summer then GBP/USD will most likely dive below 1.5000 but if Ms. Yellen’s remarks suggest that the Fed is considering waiting on the sidelines for a little longer then Sterling could rally back towards 1.5150⁄1.52000.
Heads Up
Summary of major upcoming data releases that we think may move the market.