Foreign Currency Market Update – GBP / USD Update
Sterling appreciated by around a cent against the US Dollar last week as the Federal Reserve left rates on hold and struck a dovish tone in its policy statement.
GBP/USD started last week’s session at around 1.5420 before sinking to 1.5340 on Tuesday in reaction to news that British inflation slowed from 0.1% to 0.0% in August. The dud CPI score was seen to put little pressure on Bank of England policymakers to start raising rates and this weighed on demand for the Pound.
However, Sterling leapt higher by almost two cents to 1.5520 on Wednesday thanks to some better-than-anticipated UK labour data. The headline unemployment rate dropped surprisingly from 5.6% to 5.5% and wage growth rose from an upwardly revised 2.6% to a six-year high of 2.9%. Later in the day BoE Governor Mark Carney said that rates would probably begin to rise in the second quarter of 2016 but could rise sooner if economic growth remains above trend, wage growth ticks above 3.0% and core consumer prices continue to rise towards the 2.0% target. Other BoE officials Kristin Forbes and Ian McCafferty also talked up the possibility of hiking rates whilst Martin Weale took a slightly more cautious approach.
‘Cable’ struck a three-week high of 1.5830 on Friday in response to the Federal Reserve’s decision on Thursday evening to leave interest rates on hold at 0.25% in September. The decision to wait on the sidelines was especially damaging for the ‘Greenback’ because Fed President Janet Yellen’s accompanying speech showed that only 13 out of 17 policymakers expect rates to rise in 2015, down from 15 at the previous meeting in June. GBP/USD rallied following the dovish announcement as markets cut forward contracts to reflect a 47% chance of a 2015 rate hike, down from 64% before the speech.
On Friday BoE policymaker Andy Haldane warned of the potential impact of the emerging market crisis and suggested that rates could actually go down before they go up. The dovish remarks prevented Sterling rising through technical resistance at 1.5660, which led to a bounce lower to 1.5520.
After last week’s Fed bombshell this week’s calendar looks far less exciting with US Q2 GDP set to be confirmed at 3.7% and US durable goods orders set to shrink -2.3%. If the second quarter growth figures are downgraded and the durable goods figures come in softly as expected then we could see GBP/USD rally towards resistance at 1.5660 as economists continue to question the Fed’s determination to begin hiking interest rates before the turn of the year.
Heads Up
Summary of major upcoming data releases that we think may move the market.