Foreign Currency Market Update – GBP / USD Update
Sterling strengthened by over two cents against the US Dollar last week in reaction to some upbeat UK ecostats, which caused investors to revaluate their UK growth forecasts.
The Pound increased in value by around 70 pips against the ‘Greenback’ last Monday, from 1.5260 to 1.5340, as markets reacted to rumours that US President Barack Obama had urged policymakers to maintain loose monetary policy in order to support economic growth and hold down the value of the domestic currency.
GBP/USD initially sank to 1.5280 on Tuesday morning due to news that HSBC is planning to cut around 8,000 British jobs as part of a wholesale revamp. However, Sterling recovered during the afternoon, helped by data showing that the British current account deficit narrowed from -£10.7 billion to -£8.6 billion during April.
‘Cable’ continued to surge on Wednesday, striking a 20-day high of 1.5550, as British industrial production data came in at 0.4%, beating estimates of 0.1%. The upbeat industrial report signalled that production could increase by 0.8% in the second quarter – much higher than the 0.1% uptick in Q1. Sterling also benefitted from the latest NIESR growth forecast, which suggested the economy expanded 0.6% in the three months to May.
GBP/USD grappled with psychological resistance at 1.5500 on Thursday even though US retail sales printed enthusiastically at 1.2%.
The Pound to US Dollar exchange rate registered a fresh 20-day high just shy of 1.5600 on Friday as updated British construction output data pointed towards an upgrade to UK first quarter GDP from 0.3% to 0.4%. Not even a robust US consumer confidence print of 94.6 was able to lift the ‘Greenback’ during the afternoon.
There are a number of important events to look out for this week regarding GBP/USD and subsequently it could be a week of intense volatility.
The most important UK releases look like being Tuesday’s inflation report, which is tipped to show a rise in CPI from -0.1% to +0.1%; Wednesday’s labour market report, which should see unemployment remain at a six-year low of 5.5% and average earnings accelerate from 1.9% to 2.1%; and Wednesday’s Bank of England minutes, which are predicted to reveal that all nine policymakers voted against higher rates in June. However, the minutes could also show that some rate setters were ready for tighter policy.
The British calendar has the potential to support demand for the Pound but Sterling’s gains could be cut short if US data also impresses.
Wednesday’s Federal Reserve interest rate announcement is unlikely to yield a higher benchmark rate but the report could easily show that policymakers are gearing up for higher rates at some point over the next six months. Anything indicative of a rate hike in September would seriously boost the US Dollar, whilst even data pointing towards a December hike could drive GBP/USD lower.
A predicted rise in US CPI from -0.2% to 0.0% on Thursday could also bolster demand for the ‘Buck’.
Strong UK data and a dovish Fed report could push GBP/USD as high as 1.5800, however, it seems slightly more likely that US rate hike speculation could drive ‘Cable’ lower to 1.5400 and maybe even 1.5200.
Heads Up
Summary of major upcoming data releases that we think may move the market.