Foreign Currency Market Update – GBP / USD Update
Sterling rallied by around four cents against the US Dollar last week to recover from a five-year low as American data disappointed, thus pushing Federal Reserve rate hike bets further down the line.
GBP/USD rebounded from a five-year low of 1.4563 last Monday as markets used a one-year high UK BRC retail sales report as a prompt to start locking in profit from the multi-year low exchange rate.
And ‘Cable’ rallied by a further 150 pips on Tuesday to 1.4800 when US retail sales printed at 0.9%, which was two percentage points lower than the median market consensus of 1.1%. Although the consumer spending report marked the biggest uptick in sales volumes for over a year, the fact that it underwhelmed expectations caused investors to rein in their Fed rate hike bets. UK inflation had printed in line with analysts’ predictions at a joint record low of 0.0% earlier on in the day.
The Dollar’s woes continued on Wednesday when US industrial production came in at -0.6% for March, which represented the worst month of output that the sector had experienced for over two years and drove the majority of investors to push back their Fed hike bets from June to September of this year.
GBP/USD began the day at 1.4840 on Thursday and reached a daily high of 1.4969 during the evening as investors reacted to yet more underwhelming American economic data. This time it was a -5.7% contraction in building permits, a surprise 12,000 rise in jobless claims and a 2.0% housing starts figure, which massively undershot expectations of 15.9%.
‘Cable’ continued to surge on Friday, breaching key psychological resistance at 1.5000 for the first time in a month as traders reacted favourably to a 248,000 increase in British job creation, which took the UK unemployment rate down to a fresh seven-year low of 5.6%.
Sterling was, predictably, unable to maintain an exchange rate above 1.5000 over the weekend – it has failed to close above 1.5000 in each of its last four attempts. However, the recent shift in Fed rate hike projections combined with an important set of technical convergences suggests that the Pound could be on the verge of a large move higher against the ‘Greenback’.
Economic releases this week are predicted to show that the Bank of England is keen to leave rates low until inflation rises back towards the 2.0% target, that UK retail sales ticked along nicely at an annualised rate of 5.5% in March and that US durable goods rose by 0.6%. Barring any significant surprises the calendar is unlikely to prompt any large moves for either the Pound or the Dollar.
This leaves GBP/USD at the mercy of technical trading patterns, which suggest a sharp appreciation in Sterling, but also of UK general election jitters. So, if markets feel that negative election-based sentiment towards the Pound has been overdone then we could see ‘Cable’ shoot off towards 1.5200⁄1.53000 over the next week. But if investors remain cautious ahead of the tightest general election in decades we could see Sterling give back some of last week’s impressive gains.
Heads Up
Summary of major upcoming data releases that we think may move the market.