Foreign Currency Market Update – GBP / USD Update
Sterling rallied by around 1.5 cents against the US Dollar last week as British PMI data beat the market consensus. However, the ‘Greenback’ surged on Friday in response to a sturdy US non-farm payroll report.
The Pound started the week at around 1.5030 against the US Dollar despite data showing that British manufacturing output rose at a rate of 53.0 in January as exporters reported a surprisingly strong month of new orders.
GBP/USD rallied by around 150 pips on Tuesday thanks to seemingly upbeat developments in the Greek debt crisis saga, which reduced the appeal of the safe-haven ‘Greenback’. Sterling was also supported by a robust construction PMI score of 59.1, beating expectations of 57.0, while the US Dollar was impacted by a dreadful -3.4% contraction in US factory orders.
The Pound surpassed 1.5200 against the US Dollar on Wednesday in reaction to a sturdy UK service sector PMI score of 57.2, which featured encouraging figures for job creation and completed a trifecta of positive British purchasing managers index reports at the start of the year.
On Thursday Sterling registered another strong set of gains, rallying by around a cent to a new monthly high of 1.5340 in reaction to a concerning US trade balance report. The trade report showed that the American deficit widened by 17% to a two-year low of -$46.6 billion in December and this had a significant impact on demand for the US Dollar.
However, GBP/USD sunk back to 1.5250 on Friday when the British trade report showed a similarly poor performance – widening to a four-year low of -£10.2 billion – and a glittering US labour market report brought back hopes of an early rate rise from the Federal Reserve. Data showed that US non-farm payrolls increased by 257,000 in January and that average earnings rose by 2.2%, which appeared to give the US central bank the impetus to start considering the best time to embark on its long-awaited rate hiking cycle.
Looking ahead to the coming week and it is difficult to see Sterling clawing its way back to the heady heights of 1.5300 unless Bank of England Governor Mark Carney shocks everybody with a hawkish inflation report on Thursday.
The BoE announcement is hotting up to be the event that overrides all others in terms of GBP/USD impact this week, and it is likely to see Mr Carney react to the recent plunge in crude oil by raising British growth prospects – as cheaper fuel costs increase Britons’ purchasing power – but reduce the inflation forecast – as cheap fuel drags the CPI rate even further away from the bank’s 2.0% target.
Most economists expect the UK central banker to talk down the possibility of a rise in rates during 2015, which is liable to drive Sterling down towards 1.5000 against the US Dollar. However, there is potential for the Pound to surge if Mr Carney wrong foots markets with unlikely hawkish rhetoric.
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