Foreign Currency Market Update – GBP / USD Update
Sterling struck a four-month low against the US Dollar last week as UK interest rate hike bets declined and flights to safety boosted the ‘Greenback’.
GBP/USD began last week’s session at around 1.5440 and sunk to 1.5300 by Tuesday evening as softer-than-expected manufacturing prints in both the UK and the US took a heavier toll on demand for Sterling. The UK factory output gauge slowed from 51.9 to 51.5, whilst the American equivalent cooled from 52.7 to a two-year low of 51.1.
‘Cable’ remained just above 1.5300 for most of Wednesday’s session as British construction output underwhelmed at 57.3 compared to forecasts of 57.5.
Sterling ceded more ground on Thursday when the most important British economic indicator, the service sector PMI, printed at a two-year low of 55.6, down from 57.4 previously. The US tertiary output index came in more optimistically at 59.0.
Sterling completed its worst run against the ‘Greenback’ since 2013 on Friday. The Pound to US Dollar exchange rate plunged to a four-month low of 1.5164 as markets reacted to a mixed bag of US labour data. The headline non-farm payroll report underperformed with a total of 173,000 compared to expectations of 217,000. However, the unemployment rate slid to within the Federal Reserve’s 5.0%-5.2% target range due to another month of record low participation. Overall, the data was interpreted by most to mean that the Fed will hold off on raising interest rates this month but some saw the numbers as a signal that liftoff will occur in September and this pushed GBP/USD lower on the day.
There are only two real events of note to look out for this week for the GBP/USD currency pair.
The first is Wednesday’s UK industrial production report, which could bolster the appeal of Sterling if it shows decent growth.
The second is Thursday’s Bank of England statement. Markets don’t anticipate a rate hike at this juncture, but most traders expect the minutes report to reveal that policymakers are concerned with the slowdown in China. Over the past few weeks BoE rate hike bets have been pushed back from Q1 2016 to Q3 2016 in reaction to the Chinese market crisis, which means that GBP/USD will likely remain soft if BoE officials appear anxious. Conversely this also means that Sterling could rebound strongly if policymakers show a defiant drive to continue with their plan to start hiking early next year.
Heads Up
Summary of major upcoming data releases that we think may move the market.