It was a topsy-turvy week for ‘Cable’ last week as the Pound to US Dollar exchange rate rallied on a dovish Fed statement but declined on an upbeat US labour market report.
‘Cable’ Rallies on Dovish Fed
Sterling began the week on the front foot as thin trading volumes accentuated a negative market reaction to a -0.1% decline in US inflation on Easter Monday. GBP/USD ripped higher by around 130 pips.
On Tuesday the Pound jumped another 100 pips against the ‘Greenback’ in response to a decidedly dovish policy statement from the Federal Reserve. Fed Chairwoman Janet Yellen highlighted the risks posed to the US economy by the slowdown in China and the crisis in commodity markets. She said it was better to raise rates too slowly than too quickly and shocked investors by speaking of the possibility of further quantitative easing.
Sterling continued to rally versus the US Dollar on Wednesday as dovish Fed bets caused the ‘Greenback’ to depreciate across the board. However, despite the news ‘Cable’ was capped by technical resistance just under 1.45.
UK Deficit and US Labour Market Weigh on GBP/USD
The Pound’s gains cooled on Thursday as GDP data showed that while economic growth came in at a sturdy 2.1% in Q4, the current account deficit ballooned to 7% of GDP – its worst level since records began in 1948.
On Friday Sterling was hit by a disappointing British manufacturing PMI result of 51.0 and an upbeat set of US non-farm payroll figures. The headline NFP score of 215,000 outpaced expectations of 205,000 and markets were also cheered by a 2.3% acceleration in wage growth, which beat forecasts of 2.2%. The data sent GBP/USD tumbling by over a cent.
Week Ahead
The most important events to look out for on the economic calendar this week are the UK service sector PMI and the Federal Reserve statements.
The British service sector accounts for over 70% of domestic product so the Pound could easily rally if the PMI rises from 52.7 to 53.5 as expected.
In light of the Fed’s dovish statement last week it will be interesting to see whether the central bank strikes a similarly cautious tone during press conferences this week. If so, the Pound would be expected to push ahead against the US Dollar. If not, we could see GBP/USD give back its recent gains.
Heads Up
Summary of major upcoming data releases that we think may move the market.