British Referendum Weighs
The Pound to US Dollar exchange rate got off on the wrong foot last week as fears of UK interest rates staying low for a long time were stoked by a report from Credit Suisse indicating that British growth could be cut by -2% if Britons vote to leave the European Union later this year. Demand for Sterling also stumped as Bank of England policymaker Kristin Forbes confirmed what everybody else was thinking: that weak oil prices would likely lead to underwhelming CPI acceleration and therefore rates may not need to rise as soon as initially expected.
GBP/USD recovered on Tuesday as profit taking stances kicked in but Sterling floundered again on Wednesday as the Federal Reserve struck a dovish tone – but a slightly less dovish tone than many analysts had bargained for. The cautious Fed statement put emphasis on the impact that volatility in China could have on world and US markets but still kept the door open to another rate rise in March.
UK Growth Outstrips US GDP
However, the Pound managed to claw back some losses on Thursday when UK GDP printed at 0.5% for the fourth quarter of 2015, up from 0.4% in Q3. The data meant that British growth for the year fell from 2.9% in 2014 to 2.2% in 2015 but optimism was capped by the details of the report, which showed that activity was largely driven by domestic rather than foreign demand.
On Friday annualised US GDP came in at just 0.7%, indicating that the world’s largest economy grew by less than 0.2% in the fourth quarter. But this news did not hamper the ‘Greenback’ against the Pound because Sterling was subject to intense selling pressure in reaction to enhanced ‘Brexit’ fears as PM David Cameron failed to secure a deal with EU leaders. Overall, GBP/USD was pretty much flat over the week.
BoE’s ‘Super Thursday’ & US Non-farm Payrolls
This week’s calendar features some interesting data for both the US and UK. Both nations see service sector scores for January released on Wednesday, with the UK and US figures expected to print in the region of 55.4.
This leaves the BoE’s ‘Super Thursday’ triple announcement as the biggest UK event to keep an eye on. Investors expect the bank to leave monetary policy unchanged but analysts will be scouring Governor Mark Carney’s inflation statement for clues on future moves. If Carney highlights the threats posed by the potential in/out EU referendum then GBP/USD could weaken. But if the Governor looks through the current inflation crisis and speaks of raising rates before the end of 2016 then we could see ‘Cable’ mount a significant recovery.
Friday’s US non-farm payroll report is likely to show a 190,000 gain in the labour market in January, which although down on December’s bumper 292,000 would still mark a decent performance.
GBP/USD Outlook
Given that the GBP/USD downtrend has paused for the last ten days there is potential for a rebound in Sterling’s favour. If the BoE boosts UK sentiment then we could see the Pound appreciate by around 250 pips over the next few weeks. But if Carney disappoints we could see ‘Cable’ slide by around -150 pips.
Heads Up
Summary of major upcoming data releases that we think may move the market.