Foreign Currency Market Update – GBP / USD Update
The Pound to US Dollar exchange rate spiralled lower by around four cents last week, bringing GBP/USD to its lowest level since mid-2010.
Sterling rose from 1.5050 to 1.5135 last Monday as traders reacted to a sanguine retail sales report from the British Retail Consortium (BRC) showing that sales volumes grew by 1.7% in February, which is usually seen to be a slow month for the retail sector.
The Pound drifted slightly lower to 1.5075 on Tuesday despite comments from Bank of England Governor Mark Carney that appeared to rule out the prospect of further monetary stimulus in the UK. Mr Carney confirmed that inflation was likely to remain low for the duration of the year but commented that it would be ‘foolish’ to spark volatility with further easing measures at this juncture.
However, Sterling sunk through the psychologically significant support level of 1.5000 on Wednesday and proceeded to weaken by around 150 pips to a new 20-month low of 1.4938. The motivation behind the move was a disappointing -0.1% contraction in UK industrial output, which underperformed analysts’ expectations of +0.1%.
With key support at 1.5000 broken, ‘Cable’ continued to weaken through Thursday, falling to 1.4880 as BoE Governor Carney cautioned that rates could remain low for longer if Sterling’s recent appreciation against the Euro started to have a negative impact on British exports across the channel.
The Pound to US Dollar exchange rate then tumbled to a four-and-a-half-year low of 1.4700 on Friday in reaction to a report showing that British construction output shrunk -2.6% in January.
The only two important events on this week’s economic calendar both happen to fall on Wednesday: the UK labour market report and the Federal Reserve’s policy statement.
The British labour market is unlikely to give the Pound a serious boost unless it details a shockingly strong rise in UK average earnings.
The Fed statement, on the other hand, has the potential to create shockwaves. Due to the recent stream of upbeat US non-farm payroll numbers, markets expect the US central bank to remove the word ‘patient’ from its rate hike outlook. If this seemingly innocuous word is in fact removed then we could see GBP/USD remain close to 1.4700. However, if the Fed disappoints market expectations with a neutral/cautious tone to its statement then there is potential for Sterling to claw its way back towards 1.5000.
Heads Up
Summary of major upcoming data releases that we think may move the market.