Foreign Currency Market Update – GBP / USD Update
The Pound strengthened by around 100 pips against the US Dollar last week even though Federal Reserve Governor Janet Yellen talked up the possibility of raising US interest rates as early as December.
Sterling rallied from 1.5320 to 1.5350 last Monday in reaction to a downbeat US new home sales print of -11.5%. But demand for the Pound softened on Tuesday when the latest UK GDP report pointed towards a slowdown in British growth to 0.5% in the third quarter. Data in America also disappointed, with durable goods orders declining -1.2% and consumer confidence dipping from 102.9 to 97.6.
GBP/USD shrunk to 1.5240 on Wednesday evening in response to a surprisingly hawkish statement from Fed Chairwoman Janet Yellen, which saw investors raise their December rate hike projections from 37% to 50%. Yellen talked down the significance of problems in the global economy and focussed on America’s steady jobs growth figures before making explicit reference to the possibility of a dose of monetary tightening before the end of the year.
However, the ‘Greenback’ was unable to hold onto its gains against Sterling for long and ‘Cable’ recovered its losses on Thursday in reaction to a sharp deceleration in US GDP from 3.9% to 1.5%. And Sterling pushed ahead further to reach a 10-day high on Friday as US personal income, personal spending and consumer confidence all slowed.
The key events to look out for this week are the UK service sector report for October, the Bank of England’s quarterly inflation report and the October US non-farm payrolls report.
With UK manufacturing staging a remarkable recovery in October – rising from 51.5 to a 16-month high of 55.5 – investors are hopeful that the more significant British service sector PMI also impresses. A strong services number could prompt a hawkish statement from BoE Governor Mark Carney on Thursday as positive developments bring everything apart from inflation inline with the bank’s targets for a rate rise. The Pound could rally strongly if Carney brings UK rate hike bets forward to Spring of next year.
But the US Dollar could fight back if Friday’s NFP report shows an acceleration of job gains in October from 142,00 to 180,000 as expected. This would give December rate hike bets a massive boost; anything over 200,000 would likely be seen as even more conclusive.
Heads Up
Summary of major upcoming data releases that we think may move the market.