Foreign Currency Market Update – GBP / USD Update
Sterling declined by around -250 pips against the US Dollar last week as markets reacted to comments from the Federal Reserve suggesting that rates will still be raised later this year.
GBP/USD softened from 1.5720 to 1.5670 on Monday as traders geared up for Tuesday’s UK CPI report, which, when released, showed that Britain fell into disinflation during April and weakened demand for Sterling even more.
The -0.1% inflation print caused traders to pull back their Bank of England rate hike bets and this sent ‘Cable’ sliding below 1.5500. The ‘Greenback’ was also supported by some red-hot US housing market data showing that building permits rose 10.1% and housing starts jumped 20.2% in April.
The Pound to US Dollar exchange rate ticked higher to 1.5550 on Wednesday in reaction to comments from the Bank of England suggesting that rates will be raised over the next 12 months and that some policymakers were beginning to consider voting for tighter monetary policy already. Across the pond in the States, the Federal Reserve all but ruled out the potential for a rate rise in June and this worked against the ‘Greenback’.
And GBP/USD surged again on Thursday thanks to a robust 1.2% rise in UK retail sales, which massively outperformed forecasts of 0.4%. The US Dollar was also hurt by speculation that the Fed could wait until the New Year to raise rates and this drove ‘Cable’ back up towards 1.5700.
However, Federal Reserve Chairwoman Janet Yellen raised the US Dollar’s spirits on Friday by commenting that, despite the recent slowdown in economic data, she still expects rates to rise before the end of the year. US inflation printed at -0.2%, as anticipated, but this was largely overshadowed by the encouraging comments from Ms. Yellen, which took GBP/USD down below 1.5500.
Provided no prominent central bank officials make any shock announcements this week the Pound could strengthen against the ‘Greenback’ in reaction to the upcoming dataset.
Demand for the Dollar could wane because US durable goods are anticipated to have shrunk -0.5% in April and first quarter American GDP is liable to be downgraded from an annualised rate of +0.2% to -0.9%. Meanwhile, the Pound could benefit from a probable upward revision to British GDP from 0.3% to 0.4%.
Heads Up
Summary of major upcoming data releases that we think may move the market.