Foreign Currency Market Update – GBP / USD Update
Soft UK ecostats brought GBP/USD lower by over -200 pips at the tail end of last week’s session.
‘Cable’ began the week at around 1.5200 and stayed close to that level through Tuesday even though US inflation rose from 0.0% to 0.2% and UK CPI remained mired in negative territory at -0.1%. Investors took the uptick in American consumer prices as a sign that an interest rate hike from the Federal Reserve is very possible at next month’s meeting.
On Wednesday Bank of England Deputy Governor Ben Broadbent said that markets were ‘focussing too obsessively’ on the BoE’s two-year inflation projections, which currently suggest that interest rates will not rise until the start of 2017. Traders understood the Deputy Governor’s remarks as a hint that rates could still be raised during the first half of 2016. GBP/USD rose to 1.5250 during the evening in response to a minutes report from the Federal Reserve, which was seen to stoke December rate hike expectations but didn’t feature much to suggest that the US central bank is willing to raise rates repeatedly next year.
Surprisingly, the Pound to US Dollar exchange rate rallied to a fortnightly high of 1.5335 on Thursday, as traders locked in profit from short GBP/USD positions following the Fed’s minutes report. UK retail sales data printed disappointingly at -0.9% but the result did not have a massive impact on Sterling because markets were expecting a hangover from September’s strong 1.5% score, which benefitted from Britain hosting the Rugby World Cup.
But Sterling entered free fall on Friday morning when the worst October government borrowing figures for six years were released. The UK deficit for October stretched to -£8.2 billion, massively overshooting expectations of -£6.0 billion. This sent GBP/USD down from 1.5300 to below 1.5200 by the end of play as traders bet that UK Chancellor George Osborne would unleash a new raft of harsh austerity measures during his Autumn Statement on Wednesday in order to help meet his goal of eliminating the deficit by 2020.
We could see Sterling struggle further against the ‘Greenback’ this week if data shows, as expected, that US GDP accelerated from 1.5% to 2.0% in the third quarter and that US durable goods orders rebounded from -1.2% to +1.5% in October.
The UK GDP report is tipped to confirm quarterly growth of 0.5% in Q3 but analysts will be scouring George Osborne’s latest budget for growth-sapping measures. If the Autumn Statement is deemed harmful to UK growth prospects then we could see GBP/USD start depreciating towards psychological support at 1.5000.
Heads Up
Summary of major upcoming data releases that we think may move the market.