Foreign Currency Market Update – GBP / USD Update
The Pound to US Dollar exchange rate peaked at an eight-week high of 1.5552 last week as speculative traders continued to price-in the possibility of a Bank of England rate hike at the start of 2016.
GBP/USD rallied by around a cent from 1.5360 to 1.5460 on Monday as traders reacted to a worse-than-anticipated -4.9% drop in US existing home sales.
And Sterling pushed ahead further on Tuesday thanks to comments from Bank of England Governor Mark Carney intimating that rates would start to rise gradually at some point in the next two years. The central banker said that business owners should continue to increase the wages of their employees to reflect an expected uptick in consumer prices over the next 12 months. During the evening Federal Reserve Chairwoman Janet Yellen said that interest rates were likely to rise at around the midpoint of this year, but tempered optimism by saying that the benchmark rate would remain at the current record low until then.
The Pound continued to strengthen through Wednesday and reached a new eight-week high of 1.5552 in the early hours of Thursday morning. However, a better-than-anticipated core US CPI report showed that, without the effects of food and fuel, American inflation actually increased at a sturdy rate of 1.6% in January. The ‘Greenback’ also benefitted from a bumper 2.8% US durable goods reading, which pushed GBP/USD down to 1.5420.
On Friday it was announced that US economic growth slowed from 5.0% to 2.2% in the fourth quarter, meaning that, with 2.7% growth, Britain was the fastest growing G7 major economy in 2014.
With Sterling now trading at around 1.5400 against the US Dollar it will be interesting to see whether the recent rally will continue and take the Pound to significant resistance at 1.5600, or whether demand for the US Dollar will take GBP/USD back down towards psychological support at 1.5000.
The most important data releases to look out for in the UK are Wednesday’s service sector report and Friday’s BoE 12-month inflation expectations gauge; the BoE policy announcement is almost certainly going to be a non-event.
The British service sector PMI is tipped to improve from 57.2 to 57.5, which should support Sterling, but anything higher than 58.0 could give the Pound a real boost. Similarly, an inflation projection in the region of 2.5%, as anticipated, could bolster the appeal of the Pound.
Across the pond in the United States, by far and away the most important ecostat on the calendar is Friday’s US non-farm payrolls report, which is expected to slow slightly from 257,000 to a still robust score of 235,000. Anything below 200,000 could dampen Fed rate hike expectations but anything above 250,000 could drive the ‘Greenback’ higher.
Heads Up
Summary of major upcoming data releases that we think may move the market.