Foreign Currency Market Update – GBP / USD Update
The Pound strengthened by around 150 pips against the US Dollar last week as Federal Reserve rate hike bets were tempered by a series of un-telegraphed currency devaluations in China.
GBP/USD rebounded from a monthly low last Monday to drive higher by over a cent to 1.5600 as investors toned down their Fed rate hike projections.
Sterling retained sturdy demand on Tuesday as markets reacted to a shock announcement from the People’s Bank of China (PBoC) that it was allowing the Chinese Yuan to depreciate by around 2%. The news highlighted the degree of uncertainty still present in global financial markets, weighed on commodity prices and risked stoking deflationary trends – all of which were seen as reasons to be more cautious about the fabled September Fed rate hike.
‘Cable’ continued to rally on Wednesday, rising by around half a cent to 1.5650, despite data showing that British wages slowed from 3.2% to 2.4% and unemployment rose by 63,000 in the three months to June. The reason for the Pound’s strength and ‘Greenback’s’ weakness was another surprise announcement from the PBoC, which saw the domestic currency devalued by a further 2%.
The Chinese central bank acted again in the early hours of Thursday’s session by allowing the Yuan to weaken by a further 1% but the US Dollar managed to mount a rally during the afternoon when data showed that US retail sales rebounded from a -0.3% contraction in June to advance 0.6% during July. The positive print helped drive GBP/USD down to 1.5610.
Friday was a very interesting day for the Pound to US Dollar exchange rate because US industrial production came in stronger-than-anticipated at 0.6%, which doubled forecasts of 0.3%, but the ‘Greenback’ failed to rally versus the Pound. With all the recent talk of the Fed raising rates in September if domestic data releases continue to tick higher it was telling to see that the ‘Buck’ did not appreciate following the surge in factory output. This could be seen to suggest that the week’s triple-whammy of shock Chinese currency devaluations are weighing on investors’ minds and their Fed rate rise projections.
Data this week is expected to show that both the UK and the US maintained low inflationary climates, with scores of 0.0% and 0.2% respectively. Barring any deviations from the market forecasts the pair is unlikely to fluctuate heavily following the releases.
A sturdy UK retail sales report on Thursday could boost the Pound – but that’s only if Wednesday’s highly anticipated Federal Reserve meeting minutes confirm what cautious traders are already thinking: that global volatility, most significantly in China, is likely to push back the US central bank’s first rise in rates until December. If the Fed minutes signal a December rate hike then we could see demand for the Pound surge, possibly giving way to a break above longstanding technical resistance at 1.5700.
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