Foreign Currency Market Update – GBP / USD Update
Sterling rebounded against the US Dollar last week following another drop below key psychological support at 1.5000.
‘Cable’ dipped below 1.5000 last Tuesday in reaction to a factory report showing that UK manufacturing production shrunk 0.4% during the month of October. However, Sterling buy orders were triggered and GBP/USD climbed back above the important support barrier before the end of the day.
The Pound to US Dollar exchange rate stormed higher by over 150 pips to 1.5180 on Wednesday as investors piled into the Pound ahead of an important statement from the Bank of England.
However, the BoE noted on Thursday that slowing wage growth could persuade policymakers to refrain from raising interest rates for longer than some analysts currently anticipate. The BoE also stated that it has no obligation to follow other central banks – i.e. the Federal Reserve – and will only start tightening monetary policy when the UK economy is ready. The slightly dovish remarks pushed GBP/USD down to 1.5140.
However, a softer-than-anticipated US retail sales result of 0.2% on Friday afternoon, which was accompanied by a surprise stagnation in business inventories and a slower-than-hoped rise in consumer sentiment impacted the ‘Greenback’ and allowed Sterling to rally by around 80 pips.
This week’s data is likely to see UK inflation rise from -0.1% to +0.1% but any positive reaction to that score is liable to be trumped by a predicted acceleration in US consumer prices from 0.2% to 0.5%. Sterling is also liable to struggle if British wage growth slows from 3.0% to 2.5% as anticipated.
But the main event for GBP/USD, FX markets and the global economy in general, is the Federal Reserve’s interest rate decision on Wednesday evening. The Fed is now expected to announce a 25 basis point hike to the benchmark interest rate, but this has been priced into the ‘Greenback’ for a long time now so may not have a giant impact on GBP/USD.
Instead, the market reaction is likely to focus on Fed Chairwoman Janet Yellen’s post-decision statement. If Yellen paves the way for three or more further rate hikes in 2016 then the US Dollar could strengthen and GBP/USD could drop below 1.5000. However, if Yellen strikes a cautious tone then we could even see Sterling rally following the Fed’s first hike in nine years.
Heads Up
Summary of major upcoming data releases that we think may move the market.