Foreign Currency Market Update – GBP / USD Update
The Pound to US Dollar exchange rate tumbled to a fresh five-year low last week on fears that the upcoming general election could have a significantly negative impact on UK economic sentiment.
GBP/USD came close to key psychological resistance at 1.5000 at the start of last week’s session on the back of March’s dismal US non-farm payroll report.
However, Sterling was unable to break through resistance and ended up rebounding lower despite data showing that the British service sector, which accounts for over 70% of total economic output, printed at an eight-month high of 58.9 in March.
‘Cable’ had one more go at breaching the key 1.5000 target on Wednesday in the build-up to the Federal Reserve’s latest policy statement, but the neutral wording of the report (which pointed to a rise in rates at some point in 2015) was not deemed enough to significantly alter Fed rate hike bets. Incidentally, September currently looks like the date for ‘lift-off’ on rates.
And Sterling fell sharply by over 175 pips on Thursday as markets invested heavily in contracts to protect themselves against strong fluctuations in the value of the Pound – said contracts rose to their highest level since 2011. The fear is that, with this year’s general election set to be the closest for decades, political uncertainty will reign following the vote whilst a larger-than-usual number of parties attempt to form a sustainable coalition. Data shows that financial markets and domestic currencies usually suffer severe losses around the timing of tight elections.
GBP/USD’s losses continued on Friday as UK industrial output printed softly at just 0.1%, which suggested that confidence from the PMI surveys may not be painting an accurate picture of the UK economy at this moment in time. The data print drove some investors to predict that British growth slowed from 0.6% to 0.4% in the fourth quarter and this pushed Sterling down to a new five-year low of 1.4586 against the US Dollar.
Although UK unemployment is set to strike a fresh six-year low of 5.6% later this week, the Pound is likely to struggle against the ‘Greenback’ as UK general election jitters continue to dictate market trading patterns. The fact that UK inflation is tipped to remain at an all-time low of 0.0% is also liable to dampen demand for the world’s oldest currency. Meanwhile the world’s primary business currency could derive support from a predicted 0.1% rise in inflation and 1.0% uptick in retail sales.
The potential for a GBP/USD rebound exists but the possibility of further weakness is stronger.
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