The Pound to US Dollar exchange rate softened by around a cent last week as downbeat UK PMI data prompted a shift in Bank of England easing expectations.
British Data Impresses At Start of Week
Sterling began last week’s session strongly, rallying towards 1.33 in reaction to news of a £24.3 billion takeover deal. Japan’s Softbank successfully launched a bid to purchase UK tech firm ARM in a deal that would bring in the equivalent of a quarter of the UK’s annual trade deficit in one go.
However, ‘Cable’ tumbled 130 pips on Tuesday as investors concluded that rising UK inflation would not deter the Bank of England from embarking on a wide-reaching easing programme over the next few months to stimulate the domestic economy. British CPI printed at 0.5%, beating forecasts of 0.4%, however analysts believe that the BoE will continue to look through spikes in inflation – even if CPI rises as high as 3%-4%.
The Pound surged on Wednesday as optimistic traders bought into the UK currency in reaction to an anecdotal report from the BoE suggesting that the fallout from ‘Brexit’ had not been as severe as initially estimated. GBP/USD rose by over a cent in reaction to the BoE’s regional report and was boosted by data showing that UK unemployment hit a new 11-month low of 4.9% in May.
UK Private Sector Slides to 7-Year Low
A better-than-anticipated public sector borrowing report, which showed that the deficit came in £2 billion lower in June than predicted boosted Sterling on Thursday. But British data turned sour on Friday when UK private sector output plunged from 52.4 to a seven-year low of 47.7, indicating the economy could have entered a contractionary period in July. ‘Cable’ depreciated nearly two cents in response.
The dreadful PMI numbers prompted BoE policymaker Martin Weal to call for immediate stimulus at the start of this week’s session, which led to another strong bout of Sterling sell orders.
Fed Policy Decision Highlight of Economic Calendar
The big items on the calendar this week are the UK and US GDP reports and the Federal Reserve policy decision for July.
British GDP is tipped to come in at 0.5% for the second quarter but Sterling is unlikely to garner support following the figure because most of the data was collected prior to the historic EU referendum result.
US growth is predicted to have accelerated from 1.1% to 2.6% in Q2, which is liable to have a much more positive impact on the ‘Greenback’.
The Fed’s July policy announcement is highly unlikely to see the next rate hike that US Dollar holders have been waiting for since the US central bank raised borrowing costs late last year. However, the recent improvement in US labour and retail figures could prompt a positive statement, which would likely boost the appeal of the ‘Greenback’ if traders considered September to be a ‘live’ meeting. Currently, the market predicts just a 25% chance of a September hike. If this figure rises following the FOMC announcement then we could potentially see GBP/USD slide back below significant psychological support at 1.30.