Foreign Currency Market Update – GBP / USD Update
Sterling stooped to a near-four-cent decline against the US Dollar last week as markets reacted to an impressively robust US non-farm payrolls report.
GBP/USD began the week at around 1.5420 but spent the rest of the time slowly inching lower until Friday’s steep NFP related plunge.
Although US data disappointed last Monday, with construction spending coming in at -1.1% and the ISM manufacturing index sliding from 53.5 to 52.9, the ‘Greenback’ registered gains as traders locked in profit from the highest Pound to US Dollar exchange rate for eight weeks.
‘Cable’ remained flat on Tuesday as the UK construction PMI for February printed at 60.1. But Sterling plummeted to 1.5260 on Wednesday as the British service sector came in slightly weaker-than-anticipated, at 56.7, and the American equivalent rose unexpectedly to 56.9. The Pound was particularly sensitive to the underwhelming service sector score because tertiary output accounts for around 75% of the UK economy, and is therefore very important for economic growth and job creation.
GBP/USD held close to 1.5250 for the majority of Thursday’s session, which saw the Bank of England leave interest rates on hold at the current record low of 0.50%.
However, demand for the US Dollar skyrocketed on Friday afternoon when February’s non-farm payroll report showed a massive 295,000 rise in job creation. The upbeat figure beat expectations of 235,000 and helped nudge the US unemployment down two notches to 5.5%. Although the wage growth element of the report was less impressive – a slender 0.1% monthly improvement – the significant increase in employment stoked speculation of a rate hike from the Federal Reserve in June. This positive US sentiment sent ‘Cable’ lower by a further two cents to 1.5040.
With BoE rate hike forecasts suggesting that rates won’t be raised until the start of 2016, and Fed interest rates likely to rise in around three months’ time, there is potential for GBP/USD to suffer over the coming weeks. However, strong psychological support exists at 1.5000 and it is possible that a rejection below 1.5000 could set Sterling off on a little bit of a recovery rally.
Data wise the week ahead looks far from thrilling. UK industrial production is set to rise from 0.5% to 1.3%, US retail sales are predicted to rebound from -0.8% to +0.4% and US consumer confidence is expected to remain static at 95.4.
Heads Up
Summary of major upcoming data releases that we think may move the market.