‘Cable’ depreciated by around three cents at the tail-end of last week’s session as markets responded to an aggressive new package of stimulus from the Bank of England and an outperforming labour market report in the United States.
UK Data Comes in Soft
The Pound avoided any heavy defeats at the start of last week’s session despite data on Monday showing that UK manufacturing output slumped in July following the ‘Brexit’ vote. The British manufacturing index came in at 48.2 while the US equivalent printed at 52.6.
The bad news continued on Tuesday, when construction activity came in at a seven-year low of 45.9. However, Sterling did not decline on the figure: it actually rallied by over a cent throughout the day. With little fundamental data to support the GBP/USD surge, it appears that it was a case of ‘short covering’ that drove the Pound higher as investors looked to lock-in profit from short positions by buying back into the UK currency.
Wednesday saw the UK services PMI print at 47.4, which confirmed that private sector output declined at the fastest rate for seven years during July. The downbeat data suggests that the British economy could have shrunk 0.4% in the first month following the ‘Brexit’ vote but the Pound did not cede any ground to the US Dollar on this occasion.
BoE Goes in Hard
In response to the dreadful private sector reports following the EU referendum, the Bank of England announced on Thursday that it was cutting interest rates for the first time in seven years to a new record low of 0.25%. Additionally, the UK central bank upped the QE target by £60 billion to £435 billion, allocated £10 billion for the purchase of UK corporate bonds and created a £100 billion Term Funding Scheme (TFS) to help banks pass the new low interest rate onto the real economy. Governor Mark Carney hinted that each of the four easing measures could be enhanced in the future if UK economic data continues on the current path, which the BoE sees as growth of just 0.8% in 2017.
Sterling depreciated by around two cents against the US Dollar following the aggressive stimulus announcement, however, the Pound’s losses could have been even greater had it not been for comments from Governor Carney suggesting that interest rates would not be slashed below 0.10%. The central bank chief noted that he was not a fan of negative interest rates and dismissed the idea of printing so-called ‘helicopter money’ for UK citizens as an unmerited ‘flight of fancy’.
‘Cable’ plunged lower on Friday afternoon when the July US non-farm payroll report printed at 255,000, smashing forecasts of 180,000. The upbeat print was accompanied by an upgrade to previous months’ scores and a robust 2.6% rise in wage growth. The futures market now shows a 55% chance of a Federal Reserve rate hike before December.
Quiet Week Ahead for GBP/USD
The has Pound managed to hold above psychological support since the BoE stimulus package and US NFP report, however, most traders expect GBP/USD to resume its downtrend in the second half of the year, with many forecasting a new three-decade low. The BoE’s easing bias and the resurgence of Fed rate hike bets does seem to back the argument for further ‘Cable’ declines.
This week’s calendar is fairy quiet though and subsequently the Pound to US Dollar exchange rate may not be subjected to any large moves. The key US report to look out for is Friday’s retail sales print, which is tipped to come in at 0.4%. Anything higher could tip the scales in the ‘Greenback’s’ favour.