Sterling fell from an eight-month high against the US Dollar last week as traders hedged against political uncertainty ahead of June’s UK general election.
UK Data Disappoints
The Pound drifted lower versus the US Dollar last week as traders reacted to news that British government borrowing came in at £10.4 billion in April, significantly higher than market bets of £8.9 billion.
Demand for Sterling was also compromised by a downgrade to the UK’s first quarter GDP score from 0.3% to 0.2%. When viewed to two decimal places, the 0.18% expansion was the weakest figure since the fourth quarter of 2012. Markets were particularly concerned with a 1.4% slide in exports, which underwhelmed hopes that Sterling’s post-Brexit slide would boost the export sector by making British goods cheaper to foreign buyers.
Fed Rate Hike, Political Uncertainty Pull ‘Cable’ Lower
Federal Reserve policymakers commented last Wednesday that they were keen to see evidence that the US economy was not beginning to slow. But these fears were allayed on Friday when first quarter US growth was upgraded from 0.7% to 1.2%. This was interpreted by investors as a bullish sign and markets now give an 84% chance of a rate hike in June.
Sterling’s two-cent depreciation against the ‘Greenback’ last week was also influenced by a bout of UK political uncertainty. The Tories saw their lead over Labour reduced from 9-points to just 5-points on Friday, having previously stood at around 20-points 11 days earlier. This was seen to reduce the chance of Theresa May achieving the landslide majority that many hoped would strengthen her hand in the upcoming Brexit negotiations. The Pound tumbled as traders hedged against the possibility of a hung parliament.
Week Ahead
Data to look out for this week includes UK and US manufacturing reports, which are both expected to soften mildly, and the US non-farm payroll report for May, which is tipped to print at 185,000 and should be enough to keep June rate hike bets alive as long as it holds above the 100,000 mark.
This leaves GBP/USD at the mercy of the UK election polls. If Theresa May manages to regain some momentum then we could see ‘Cable’ claw back some of its recent losses, while a tighter election would present uncertainty and could therefore prompt further losses for Sterling.