‘Cable’ depreciated by around two-and-a-half cents last week as a trio of dud private sector reports suggested that the UK economy is cooling ahead of June’s EU referendum.
GBP/USD Slides From 5-Month High
GBP/USD struck a five-month high last Monday in reaction to a surprise slowdown in US manufacturing from 51.8 to 50.8. However, Sterling retreated on Tuesday when the UK factory output PMI came in much weaker, striking a three-year low of 49.2. The disastrous print marked the first time since March 2013 that UK manufacturing activity had contracted over the month.
The Pound lost more ground on Wednesday when the UK construction sector also suffered its worst score since 2013 and US traders breathed a sigh of relief as factory orders rebounded from -1.7% to +1.1%.
UK Private Sector at 3-Year Low
Sterling’s woes continued on Thursday when the highly influential UK service sector PMI printed at a three-year low of 52.3. Investors sold GBP/USD following the disappointing figure. However, selling pressure could have been much more vicious had the dominant sector (which accounts for over 75% of British GDP) tumbled below the 50.0 mark that separates growth from contraction.
Friday was a big day for the US Dollar but markets were unsure how to react to the data that hit newswires. The headline US unemployment rate disappointed forecasts by remaining at 5.0% and the non-farm payroll score came in at 160,000, confounding expectations of 200,000. This initially put pressure on the ‘Greenback’ but sentiment picked up swiftly as bullish investors took heart from a better-than-anticipated acceleration in wage growth from 2.3% to 2.5%.
Week Ahead
Despite some hawkish comments from Federal Reserve policymakers in recent weeks, traders do not expect the central bank to continue its rate hiking cycle next month. The prospect of a ‘Brexit’ vote is too significant to risk unsettling global markets with a rise in borrowing costs that could easily wait until later on in the year. This means that this week’s US data releases, such as retail sales and consumer confidence, may struggle to have much of an impact on the Pound to US Dollar exchange rate.
Similarly, the key British release this week is the Bank of England’s ‘Super Thursday’ trio of central bank announcements. The bank is very likely to leave policy on hold and forecasts probably won’t be altered too much either, given the huge uncertainty surrounding next month’s EU referendum. The most important element of the announcement may turn out to be the minutes report, because any votes to reduce interest rates could easily put downward pressure on the Pound.
Heads Up
Summary of major upcoming data releases that we think may move the market.