Foreign Currency Market Update – GBP / USD Update
Sterling rallied by around three cents to a new two-month high against the US Dollar last week as markets reacted positively to the decisive UK general election, which saw the Conservative party claim an unexpected outright majority of seats.
‘Cable’ began the week at around 1.5110 but picked up some steam on Tuesday when the ‘Greenback’ suffered from the worst US trade balance figure since 2008. The US Dollar declined in reaction to the sharp widening of the US deficit from -$35.9 billion to -$51.4 billion, which overshadowed an underperforming UK construction PMI print of 54.2.
And GBP/USD rallied to around 1.5250 on Wednesday thanks to a sturdy eight-month high UK service sector PMI. The unexpectedly robust print of 59.5 in Britain’s dominant tertiary sector raised hopes that GDP growth could accelerate from 0.3% to 0.8% in the second quarter and this benefitted the Pound.
But the main event last week was always going to be Thursday’s general election: and it did not disappoint (in terms of market moving volatility, at least). The untelegraphed majority Tory victory boosted UK stocks and shares and sent the Pound scuttling up the currency ladder. Sterling strengthened by around two cents to a two-month high of 1.5500 because investors were buoyed by the fact that Britain was not plunged into a potentially confidence sapping period of political and economic uncertainty, which could have ensued had there been another hung parliament as anticipated.
US non-farm payrolls rebounded from March’s dismal 85,000 to 223,000 on Friday afternoon, and the American jobless rate tumbled to a fresh seven-year low of 5.4% but it was not enough to lift the US Dollar against the revitalised Pound Sterling.
The main events to look out for this week are Wednesday’s UK labour market numbers and the Bank of England’s quarterly inflation report.
The BoE is almost certainly going to refrain from modifying monetary policy at midday today but the inflation report on Wednesday could easily see the central bank put forward the case for higher rates sooner than previously projected. Recent comments from Governor Mark Carney suggest that policymakers are starting to eye a rise in UK inflation in the second half of the year and a possible rise in interest rates around halfway through 2016.
An upbeat labour market report would obviously boost Sterling’s prospects; whilst a soft number could put UK rate hike bets on hold.
In terms of US data, a fairly damp 0.2% uptick in retail sales is unlikely to bolster demand for the ‘Greenback’ but there is always scope for GBP/USD to fall following last week’s three-cent gain.
Heads Up
Summary of major upcoming data releases that we think may move the market.