The Pound to US Dollar exchange rate rallied by around a cent last week as the Federal Reserve left rates on hold and US GDP printed less than half as high as anticipated.
GBP/USD Rises on Neutral Fed
Sterling managed to avoid any significant losses versus the ‘Greenback’ at the start of last week’s session despite data showing that, since ‘Brexit’, UK manufacturers are more pessimistic about business prospects than they have been since the zenith of the financial crisis in 2009. The Pound was also at threat from an increase in rate cut bets following policymaker Martin Weale’s call for ‘immediate stimulus’.
US data showed that service sector output cooled from 51.4 to 50.9 but sentiment was boosted by a better-than-expected consumer confidence print of 97.3, above forecasts of 95.9.
‘Cable’ rocketed higher from below 1.31 to above 1.32 on Wednesday in response to the Federal Reserve’s decision to leave rates on hold at 0.50% in July. Although the Fed’s statement mentioned that near-term risks had deteriorated, it featured no hints that rates would be hiked anytime soon and this weighed on the US Dollar. Earlier in the day UK Q2 GDP printed at 0.6%, up from 0.4% previously, but Sterling was unmoved because the report showed that almost all of the growth took place in April before tailing off in May and June as spending patterns trended lower in the run-up to the referendum.
GBP/USD tumbled on Thursday as BoE policymaker David Blanchflower talked of the possibility of negative interest rates. However, the Pound fought back on Friday in response to US data showing that the world’s largest economy grew by just 1.2% in Q2, confounding expectations of 2.6%. The underwhelming print was seen to reduce the prospect of a 2016 rate hike from the Federal Reserve.
BoE in Focus: ‘Cable’ Could Resume ‘Brexit’ Slide
The main event to look out for this week is the BoE’s policy announcement at midday on Thursday.
Analysts are widely anticipating a 25 basis point cut from the UK central bank but there is potential for more aggressive easing.
A simple 25-point reduction in the benchmark rate would probably push GBP/USD back down towards 1.30. However, Sterling could slide below psychological support at that level if the BoE decides to cut rates by more than 25 basis points or opts to renew its bond-buying QE scheme. ‘Cable’ touched a three-decade low of around 1.28 following the ‘Brexit’ vote and it is possible that we could see the Pound sink below this level if the Bank of England embarks on a highly aggressive easing scheme comprising sharp rate cuts, additional QE and other unconventional monetary tools.
The next ecostat to look out for is Friday’s US non-farm payroll report, which is tipped to come in at 175,000 in July, down from 287,000 in June. If the NFP score matches economists’ forecasts then GBP/USD should trade with a neutral-to-negative bias. A higher score would certainly weigh on the Pound, while a lower number could give Sterling a little bit of a boost.