‘Cable’ dropped to a five-week low last week as UK data disappointed and Federal Reserve rate hike bets surged.
Hawkish Fed Officials Take Limelight
Going into last week’s session, traders were focussing on Donald Trump’s first Presidential address to the houses of Congress. However, the speech didn’t live up to the hype. Trump struck a conciliatory tone, softening his approach to protectionist measures, but did not give any significant clarity on his plans to reform taxes and spend big on infrastructure. This milder tone prevented markets selling the US Dollar, but the lack of policy detail prevented the ‘Greenback’ from taking off.
However, demand for the US Dollar did ramp up over the week due to a slew of hawkish statements from Fed policymakers. The CME futures tool, which tracks the probability of a rise in rates in March, started the week below 30% and ended it just below 80%.
Data in the week also boosted the appeal of the ‘Greenback’, with US consumer confidence rising to a 15-year high of 114.8, ISM’s manufacturing index accelerating to a two-and-a-half-year high of 57.7 and ISM’s service sector indicator hitting a one-year high of 57.6.
UK Data Weighs
It was a different story for British data however, with only the construction PMI – the least influential of the private sector reports – printing positively.
Construction output, which accounts for around 7% of GDP, rose slightly from 52.2 to 52.5. But manufacturing activity shrunk from 55.7 to 54.6 and the dominant service sector, which makes up more than 70% of UK growth, tumbled from 54.5 to a five-month low of 53.3 in February.
The slide in consumer trends weighed on the Pound because of fears that rising price pressures coupled with stagnating wages could lead to a marked slowdown of economic activity later in the year.
Week Ahead
Following a two-cent depreciation last week, the Pound to US Dollar exchange rate is liable to flatline for most of this week’s session.
The big event to look out for is Friday’s US non-farm payroll report. Last Friday Fed Chairwoman Janet Yellen noted that it would be ‘appropriate’ to raise interest rates soon if the US economy continued to evolve as expected. This means March hike bets could jump again if Friday’s influential NFP report prints positively. Analysts are primed for a score of 190,000. Anything above 150,000 would probably keep March bets alive, while anything above 220,000 could give the ‘Greenback’ a significant boost.