Looking ahead this week and UK Manufacturing PMI is predicted to show a minor contraction, but the main event risks are to be found across the pond and they all relate to the Fed’s own easing programme.
Foreign Currency Market Update – GBP / USD Update
The Pound continued to slide against the US Dollar last week, falling as far as 1.5636 on Friday as US consumer sentiment improved. Sterling’s case for stronger rates against the Dollar reached its highpoint last month when strong PMI’s and rising inflation had halted calls for further quantitative easing measures. However the optimism surrounding the UK economy was proved premature, and the Pound’s case was thrown out of court when UK GDP declined for the first three months of 2012 and heavy Eurozone exposure led to a slowdown in the construction industry. As the case for further QE picks up more momentum it’s difficult to see Sterling replicating its earlier strength against the US Dollar.
The Pound lost out on half a cent against the Buck on Tuesday as the headline UK CPI inflation figure came in lower than was initially expected at 3.0%. The previous month’s figure printed at 3.5%. This slowdown in consumer price rises gives the Bank of England more room to work with and many see the result as a license to increase the asset purchasing fund. The negative impact of falling UK inflation trickled through into investor’s pricing of the Pound until Wednesday morning, when weak UK Retail Sales and a dovish BoE minutes report accelerated Sterling’s decline by a further half-cent. By this point the Pound’s downward trend had taken it from 1.5835 at the start of the week to 1.5646 just 3 days later.
The rest of the week saw a further downgrade to first quarter UK GDP and global risk off trading combine to keep GBP/USD below 1.5700. As markets, banks, and political leaders began to digest the possibility of a Greek exit from the Eurozone, investors decidedly lost their appetite for risk and this benefitted the safe haven US Dollar.
Looking ahead this week and UK Manufacturing PMI is predicted to show a minor contraction, but the main event risks are to be found across the pond and they all relate to the Fed’s own easing programme. With a further bout of QE looking increasingly likely in the UK, it is important for the Dollar to avoid similar treatment if it is to punish the Pound even more. If first quarter US GDP can avoid a significant downgrade, US Non-farm Payrolls can post an improvement, and US ISM Manufacturing can remain above 53.0, then the Fed are likely to remain on the sidelines and this will allow the Buck to appreciate. However, if one or more of these ecostats slip-up, and perform less than gallantly, then the prospect of QE3 will return and its sceptre could rejuvenate the Pound versus the Dollar.
Summary of major upcoming data releases that we think may move the market.
- The Pound continued to make strong gains versus the Euro
- Sterling Euro US Dollar Foreign Currency Forecast – The pound continued its current downward trajectory
- GBP CAD’s recovery has continued over the past week
- Sterling took a pummelling from the US Dollar last week with GBP/USD opening this week’s trading at 1.5812
- The Pound continued to trade lower against the U.S Dollar yesterday, retreating to a low just above 1.56