Sterling followed a series of eight-month lows by sinking to a five-year low against the US Dollar last week as risk aversion trends supported the safe-haven ‘Greenback’.
The Pound fell by around half a cent against the Dollar last Monday as UK manufacturing output slowed to a three-month low of 51.9. US factory output performed even worse, with a six-year low of 48.2, but the ‘Greenback’ absorbed flights to safety as weak Chinese manufacturing data spooked financial investors.
Chinese related risk concerns drove ‘Cable’ lower by a further -50 pips on Tuesday as the Pound reached an eight-month low of 1.4650 in reaction to news of Chinese intervention in equity markets.
On Wednesday UK services PMI slowed minimally from 55.9 to 55.5 and US ADP employment shot up from 211,000 to 257,000. The ‘Greenback’ rallied by another half-cent as Federal Reserve policymakers confirmed that the decision last month to raise interest rates had been unanimous.
The Pound to US Dollar exchange rate succumbed to a new five-year low of 1.4533 on Thursday in reaction to news that the People’s Bank of China (PBoC) had allowed the Yuan to drop to a five-year low, which in turn stoked risk aversion trends and caused the Chinese stock market to shutdown after just 29 minutes after a ‘circuit breaking’ -7% drop in value.
A robust US non-farm payrolls print of 292,000 on Friday, up from estimates of just 200,000, drove GBP/USD lower to a new five-year low of 1.4495 and the prospects don’t look good for Sterling.
Bets that the Bank of England will not begin its tightening cycle in the first half of 2016 are increasing due to fears of an imminent in/out EU referendum and concerns that 12-year low oil prices will weigh on inflation. The US Dollar, on the other hand, has already seen rates rise once and has a central bank behind it that currently plans to hike by a further 100 basis points this year.
Data this week is expected to show that UK manufacturing output shrunk -0.8% in November and that US retail sales declined -0.1% in December. Markets are unlikely to react strongly to these figures, neither are they likely to be moved by the BoE’s almost certain 0.50% interest rate announcement on Thursday.
It seems that risk trends, which are currently very negative, are probably going to hold the key for GBP/USD this week. 1.4640 is the next resistance level and 1.4520 is the next support.
Heads Up
Summary of major upcoming data releases that we think may move the market.