Foreign Currency Market Update – GBP / USD Update
After sinking to a seven-month low on enhanced Fed rate hike bets the Pound to US Dollar exchange rate recovered last week.
GBP/USD rallied from around 1.5000 to 1.5070 last Monday as technical support held firm. ‘Cable’ remained close to 1.5070 on Tuesday as both the UK (52.7) and the US (48.6) suffered weaker-than-anticipated manufacturing output results.
But things started to deteriorate for the Pound on Wednesday. Sterling weakened initially when British construction activity slowed to its lowest level since April (55.3) and GBP/USD continued to slide during the afternoon when US ADP employment printed positively at 217,000. Sterling slumped further during the evening in response to a set of hawkish remarks from Federal Reserve policymaker Janet Yellen, which appeared to pave the way to a rate hike later this month. Yellen noted that recent data was ‘consistent’ with the bank’s forecasts for inflation to ‘move back to the 2.0% objective over the medium term’.
The hawkish Fed statement brought GBP/USD lower by around -170 pips to a seven-month low of 1.4900.
However, 1.5000 is often referenced as a key psychological support level for ‘Cable’ and investors were keen to buy back into the Pound below this level. GBP/USD rebounded all the way to 1.5150 on Thursday as traders reacted to softer-than-expected new stimulus in Europe, which weakened GBP/EUR and gave rise to optimism that the Bank of England may decided to start tightening monetary policy sooner rather than later. Sterling also benefitted from a four-month high services score of 55.9.
On Friday US non-farm payrolls printed at 211,000, which further cemented December Fed rate hike bets. But because a potential December hike was strongly priced into the market already the reaction was fairly muted.
This week’s session is fairly quiet for the ‘Greenback’, with US retail sales set to print at 0.3% on Friday. However, we could see further support for the Pound on Thursday if BoE Governor Mark Carney does in fact strike a slightly more hawkish tone in light of the softer-than-anticipated ECB easing policy, which should put less pressure on UK exporters by muting Sterling’s strength versus the Euro. Overall the outlook for GBP/USD is fairly neutral.
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