Foreign Currency Market Update – GBP / USD Update
The Pound struck a new six-week high against the US Dollar last week on sturdy UK labour market data.
GBP/USD commenced last week’s session at around 1.5440 but drifted to 1.5360 by Monday evening due to concerns over Tuesday’s UK CPI report.
And these concerns were vindicated when the report showed that inflation sunk to a new record low of 0.3% in January. However, despite the consumer price index striking its lowest level since at least 1989, when records began, the Pound did not suffer any further losses against the ‘Greenback’. This is because Bank of England Governor Mark Carney recently admitted that inflation would sink towards zero in the first half of this year but still indicated that interest rates could rise at the start of next year. Therefore, there was no reason for speculative investors to drag Sterling any lower against the US Dollar.
And the Pound pushed ahead further on Wednesday when US industrial production underwhelmed at 0.2% and UK unemployment outperformed at 5.7%. The upbeat labour market report featured the lowest headline jobless rate for six years and an encouraging 2.1% rise in average real wages, which stoked BoE rate hike bets and drove GBP/USD to a new six-week high of 1.5480. The US Dollar was also negatively impacted by the Federal Reserve’s latest minutes report, which conveyed the surprisingly cautious message that rates were likely to rise in June but that some policymakers were concerned with the recent turmoil in the global economy. The Fed statement was seen to ever-so-slightly increase the possibility that interest rates could remain at record lows for longer.
GBP/USD remained close to monthly highs on Thursday but demand for the Pound dipped slightly on Friday morning in reaction to disappointing UK retail sales data. The consumer spending report showed that sales volumes declined -0.3% in January, which undershot analysts’ expectations of -0.2%. Meanwhile, across the pond in the United States data showed that manufacturing output accelerated from 53.9 to 54.3 at the start of February. This worked to bolster the appeal of the US Dollar and bring ‘Cable’ down to 1.5400.
Although an uncommon triple convergence of technical patterns suggests that Sterling could lose out on up to 200 pips against the US Dollar over the next week, the recent shift in central bank rhetoric actually points towards a period of stability, or possibly further gains, for the Pound.
This week’s economic calendar appears to be stacked in favour of Sterling with UK fourth quarter GDP set to be confirmed at an annual rate of 2.7% and US Q4 GDP likely to be downgraded from 2.6% to 2.1%. The other major ecostat due for release that could send ‘Cable’ higher is the US consumer price index, which is predicted to come in at a five-year low of -0.1% and could impact Fed rate hike bets.
Overall, the likelihood is that the Pound to US Dollar exchange rate will remain somewhere in the region of 1.5340-1.5480 over the next five days.
Heads Up
Summary of major upcoming data releases that we think may move the market.