Foreign Currency Market Update – GBP / USD Update
The Pound lost ground against the ‘Greenback’ last week as markets reacted to another austerity budget in the UK, but Sterling was able to claw back some of its losses as the Federal Reserve signalled rates may not rise until the end of the year.
GBP/USD rallied from 1.5550 to 1.5620 last Monday as a key gauge of US tertiary output came in weaker-than-anticipated at 56.0.
However, demand for the Pound diminished on Tuesday even though UK industrial production was reported to have risen by 2.1% in the 12 months to May. The upbeat industrial figures were overshadowed by concerns that George Osborne’s budget would feature measures that are not conducive to strong economic growth. The Pound fell to 1.5440 against the US Dollar in the run up to the Chancellor’s announcement.
And speculators were proved correct: the first full Conservative budget for almost 20 years featured a downgrade to British growth this year from 2.5% to 2.4% and new austerity measures, such as a freezing of working-age benefits, that could stall economic growth over the next few years. ‘Cable’ declined by a further -100 pips to a four-week low of 1.5330 in response.
However, Sterling managed to mount a small rally on Wednesday evening thanks to cautionary comments from Fed Chairwoman Janet Yellen suggesting that rates could remain on hold until December. Yellen noted that she would need to see ‘more evidence that economic growth was sufficiently strong’ before hiking rates, which was seen to reduce the possibility of a rise in September.
GBP/USD flatlined as the Bank of England held rates at 0.50% on Thursday and Sterling strengthened by around 120 pips on Friday as the UK trade balance deficit narrowed to its lowest level in almost two years.
The Pound could suffer this week if UK inflation slows to zero, but it is more likely that we will see Sterling rally in reaction to strong labour market figures. UK unemployment is predicted to remain at a seven-year low of 5.5% and wage growth is tipped to hit a new five-year high of 3.3%. If these reports print inline with economists’ expectations then we could see markets drive ‘Cable’ higher as UK rate hike bets are pushed towards convergence with the Fed.
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Summary of major upcoming data releases that we think may move the market.