Both the Pound and the US Dollar suffered against most of the majors last week as a collapse in global equity markets highlighted the risk of future melee in markets, which led to a significant shift in rate expectations at the Bank of England and the Federal Reserve.
Sterling got off to a bad start against the ‘Greenback’ last Monday, sliding -150 pips as ‘Brexit’ fears weighed on demand for the Pound.
‘Cable’ recovered with a 70 pip appreciation on Tuesday as investors hedged against a dovish statement from Federal Reserve Chairwoman Janet Yellen on Wednesday. Sterling was lucky to rally considering that UK data showed a record high -£125 billion deficit in physical goods in 2015.
GBP/USD yo-yoed on Wednesday as traders anticipated a dovish speech from Fed President Janet Yellen but were treated to a slightly more upbeat than anticipated statement. Yellen noted that volatility in financial markets – specifically China – could impact the Fed’s ability to tighten policy, however, she concluded that the domestic growth outlook was consistent with a ‘gradual’ rise in interest rates over the medium term.
2020 BoE Rate Hike Bets Hurt Sterling
The Pound to US Dollar exchange rate tumbled by around -70 pips on Thursday as enhanced volatility in stock markets caused investors to push their BoE rate hike bets all the way back to 2020. The ‘Greenback’ could have strengthened further had it not been for a similarly dovish shift in outlook for the US economy. Fed President Janet Yellen spoke during the afternoon about the prospect of the world’s largest economy falling back into recession this year and the potential for the central bank slashing interest rates. Markets now predict only a 2% chance of a Fed rate hike before September – down from 87% at the beginning of the year.
‘Cable’ recovered slightly on Friday as both the Pound and the US Dollar were impacted by sharp shifts in policy expectations and large current account deficits.
Inflation Data on Tap
Looking ahead: a 0.7% rise in UK retail sales is likely to be outweighed by a dip in British wage growth from 2.0% to 1.9% and subsequently an expected multi-year low UK unemployment rate of 5.0% could have little impact on GBP/USD.
This week sees inflation data released for both Britain and the US. The British figure is tipped to show a mild improvement from 0.2% to 0.3%, which could support Sterling slightly. However, GBP/USD could be in for a shock if the US CPI rate rises from 0.7% to 1.3% as expected. With UK rate hike bets firmly anchored in the distant future (the next decade!) a sharp rise in US price pressures could trigger another Sterling slide against the ‘Greenback’.
Heads Up
Summary of major upcoming data releases that we think may move the market.