Foreign Currency Market Update – GBP / USD Update
The Pound to US Dollar exchange rate remained above the psychologically significant 1.5000 level last week due to speculation that the Federal Reserve could hold back on hiking interest rates for a little longer than previously anticipated.
Sterling grew by around half a cent against the US Dollar last Monday thanks to encouraging remarks from Bank of England policymaker Kristin Forbes, who intimated that interest rates could rise sooner-than-expected if the recent slide in inflation begins to reverse.
Demand for the Pound grew again on Tuesday, bringing ‘Cable’ to a weekly high of 1.5220, even though UK GDP printed weaker-than-anticipated. The Office for National Statistics (ONS) reported that growth in the British economy slowed from 0.7% to 0.5% in the fourth quarter of 2014, disappointing forecasts of 0.6%. However, traders opted to send GBP/USD higher on fears that the Federal Reserve could follow other central banks – most notably the European Central Bank and the Bank of Canada – in loosening monetary policy.
But Sterling sunk back to 1.5140 on Wednesday evening in reaction to Fed Chairwoman Janet Yellen’s upbeat assessment of the US economy. Ms. Yellen said that ‘economic activity had been expanding at a solid pace’, and mentioned that ‘labour market conditions have improved further’. The policy statement was seen to leave the door open to a rise in rates later on in the year and this supported the ‘Greenback’.
A 15-year low US initial jobless claims score of 265,000 helped bring GBP/USD down to 1.5050 on Thursday, and the Pound to US Dollar exchange rate remained close to that level on Friday, even though it was reported that US GDP slowed markedly from 5.0% to 2.6% in the fourth quarter. The result means that Britain, with an annual growth rate of 2.7%, was the fastest growing major economy in 2014. However, as the US economy is tipped to outperform the UK in 2015, rate hike bets point towards a stronger US Dollar this year.
The most important two events on the calendar this week are Tuesday’s UK service sector PMI report and Friday’s US non-farm payrolls report.
The dominant British service sector is tipped to have accelerated from 55.8 to 56.3 in January, which could bolster demand for the Pound. That being said, US payrolls growth is forecast to print sturdily at 235,000 and this could drive demand for the ‘Greenback’. If the UK report impresses then GBP/USD could rally, but if the NFP report beats expectations then ‘Cable’ could dip below key support at 1.5000.
Heads Up
Summary of major upcoming data releases that we think may move the market.