Foreign Currency Market Update – GBP / USD Update
The Pound reached its lowest level against the US Dollar since May last week but GBP/USD recovered on Friday when a dismal US non-farm payroll report hurt Federal Reserve rate hike bets.
Sterling fell to a four-and-a-half-month low of 1.5160 against the ‘Greenback’ last Monday as Fed Policymaker William Dudley talked up the possibility of a rate rise in 2015, possibly as soon as October.
‘Cable’ weakened ever-so-slightly on Tuesday thanks to a decent US consumer confidence print of 103.0, which exceeded market forecasts of 96.1.
Sterling dipped to a new four-and-a-half-month low on Wednesday as second quarter UK annualised GDP was revised down from 2.6% to 2.4% and the US ADP employment indicator came in positively at 200,000. The ADP report is often, as it turned out to be on this occasion, an unreliable gauge of how the NFP report will perform.
On Thursday UK manufacturing printed at 51.5, which was a little bit higher than the median market consensus of 51.3 but failed to boost the Pound because the report featured the first decline in factory employment levels for over two years. The US ISM manufacturing report printed very low at 50.2 but GBP/USD was unable to capitalise ahead of Friday’s key NFP report.
However, the September non-farm payroll report came in way below the market estimate and featured stagnant wages, the lowest participation rate since 1997 and a massive downgrade to August’s score. September’s dismal score of 142,000, combined with August’s downwardly revised 135,000, was instantly seen by traders as a bearish signal for the US Dollar. GBP/USD leaped 100 pips higher to 1.5220 in the aftermath of the result as hopes of an October rate hike were banished and two-thirds of the market bet that the Fed would not raise rates until 2016.
There are only really two key events to look out for on the economic calendar this week – the BoE interest rate decision and the Fed minutes report – however, we appear to be at a potentially significant pivot point for GBP/USD.
If Sterling can break above 1.5200 then the door could open up to a run as high as 1.5600 over the next few weeks. But if ‘Cable’ sinks towards 1.5100 there is potential for the Pound to slide towards April’s five-year low of 1.4600. The problem for the Pound is that every time US rate hike bets are pushed back there is a high chance that investors will also push back their UK rate projections because the prevailing opinion among markets is that the BoE will wait for the Fed to lead the way.
The Fed minutes will likely paint a mildly dovish picture but they shouldn’t have too much of an impact on the ‘Greenback’ because they relate to a meeting which took place before Friday’s dud NFP report.
The BoE interest rate decision is almost certainly going to see the ‘Old Lady’ leave rates on hold at 0.50% but Governor Carney’s policy statement could stoke demand for Sterling if he chooses to strike a hawkish tone in defiance of the sentiment-sapping news out of the US.
Heads Up
Summary of major upcoming data releases that we think may move the market.