Foreign Currency Market Update – GBP / USD Update
The Pound lost ground against the US Dollar last week in reaction to a couple of significant announcements from major central banks.
GBP/USD started last week’s session just below psychological resistance at 1.5500 but Sterling was unable to settle above the technical barrier.
On Tuesday demand for the Pound softened and ‘Cable’ sank to 1.5440 as US housing starts rebounded from -1.7% to +6.5%. GBP/USD remained softer on Wednesday despite a report showing that UK government borrowing dipped from £10.8 billion to £8.6 billion in September.
A glittering UK retail sales report piqued investors’ attention on Thursday morning: the two-year high 1.9% monthly acceleration in sales volumes drove Sterling back above 1.5500 briefly. However, a surprisingly dovish announcement from European Central Bank (ECB) President Mario Draghi stole Sterling’s thunder during the afternoon and GBP/USD began to weaken. The prospect of further easing in the Eurozone sent EUR/USD spiralling lower and because EUR/USD is the world’s most-traded currency pair, this subsequently led to a market-wide strengthening of the ‘Greenback’.
The US Dollar garnered more support from foreign factors on Friday when the People’s Bank of China (PBoC) shocked markets with another round of interest rate cuts – its sixth in just 12 months – which some analysts said could increase the Federal Reserve’s appetite for higher rates before Christmas. Hawkish traders argued that enhanced stimulus in China, and in Europe, would negate the need for the Fed to leave rates at rock-bottom levels through 2015. GBP/USD sunk to a 10-day low of 1.5310 in response.
The main events to look out for this week are the UK third quarter GDP report, which is tipped to slow from 0.7% to 0.6%, the US Q3 GDP report, which is expected to slow from 3.9% to 1.5% and the Fed’s October monetary policy announcement, which is anticipated to see the central bank remain on the sidelines once again.
Anything between 0.5% and 0.7% in the UK growth report is liable to prevent any large fluctuations in Sterling but the slowing US GDP report could hamper demand for the ‘Greenback’ if core personal consumption expenditure shrinks from 1.9% to 1.4% as expected. Only 7% of investors surveyed expect the Fed to hike rates this week and only 37% think rates will rise in December. If the Fed announcement features cautionary remarks then GBP/USD could rally back to 1.5500 but there is potential for Sterling to sink to 1.5200 if Fed President Janet Yellen talks up the possibility of a 2015 rate hike.
Heads Up
Summary of major upcoming data releases that we think may move the market.