Foreign Currency Market Update – GBP / USD Update
Sterling depreciated by around -150 pips against the US Dollar last week as British monetary policy bets were hurt by dovish remarks from Bank of England policymakers and US rate hike expectations improved following a positive GDP revision.
Although US data disappointed (manufacturing slowed from 54.1 to 52.6) at the beginning of the week ‘Cable’ still declined by around -75 pips.
Sterling’s losses accelerated on Tuesday when BoE Governor Mark Carney said that rates would not be raised until the domestic economy had improved further and chief economist Andy Haldane spoke of the potential for rates to go down before they go up. During the afternoon US third quarter GDP was revised from 1.5% to 2.1% and this helped drive GBP/USD down to 1.5060.
Sterling managed to rally back towards 1.5120 on Wednesday in reaction to the Autumn Statement, which saw Chancellor George Osborne announce less spending cuts that analysts had expected thanks to a £27 billion increase in forecasted government earnings over the next few years. If everything goes to plan the UK economy should expand at a rate of 2.5% over the next five years and the budget deficit should be erased. This may all be wishful thinking but it was enough to temporarily cheer Sterling traders.
GBP/USD traded slightly lower on Thursday as thin market conditions due to the Thanksgiving Holiday accentuated volatility. The Pound lost more ground on Friday as UK GDP came in at 0.5% in the third quarter, as expected, but data showed that net trade wiped off -1.5% of GDP, which stoked bets that the BoE would avoid hiking interest rates through fear that higher yields could push the Pound higher against the Euro and make products priced in Sterling less appealing to the European market.
The Pound to US Dollar exchange rate is currently trading just above key psychological resistance at 1.5000 and there is potential for Sterling to slide towards a new seven-month low this week.
Markets will be looking at UK PMI data as guidance for British growth and anything lower than the market consensus could weigh on the UK tender.
GBP/USD also faces risks from the United States where Federal Reserve Governor Janet Yellen is due to give a speech on monetary policy and November’s non-farm payroll report is expected to print at 200,000. As long as Yellen doesn’t quell December rate hike expectations and the labour market report comes in above 150,000, demand for the ‘Greenback’ is liable to remain strong. However, we could see Sterling rally if Yellen wrong-foots markets with a dovish statement or if the NFP report falls short.
Heads Up
Summary of major upcoming data releases that we think may move the market.