Pound Dollar Rate Volatile as Currency Markets Bounce Around on Data Releases
The pound to dollar exchange rate (GBPUSD) has bounced higher towards 1.5167 as markets take direction almost exclusively from economic data releases.
Updates:
- Further woe for the USD on Wednesday as ADP Employment data reads at 169K, markets had priced the USD for a reading of 200K. Not looking good for Friday's release of non-farm payrolls.
- Boost for USD on Thursday as Initial Jobless Claims beat expectations coming in at 265K as opposed to the 280K forecast. The market is very-much data dependen and volatile.
Forget the elections. It seems every commentator out there is attributing movements in the pound sterling to electoral uncertainty.
The fact remains that at the present time the British pound and US dollar are taking direction from what really matters – the state of the US and UK economies.
Specifically, traders are looking for hints and trends that they believe will influence the time both the Bank of England and US Federal Reserve will start raising intrest rates. Put simply, rising interest rates support rising currencies and interest rates are only lifted if economic data confirms strengthening economies.
That said, expect volatility in GBP to emerge once results are announced on Friday – only then will there be anything of substance for foreign exchange traders to chew on.
Our central thesis is that the outcome will ultimately be pro-status quo and will allow traders to fully focus on the bigger picture.
On Thursday the British pound to dollar exchange rate is trading at 1.5173.
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It’s About the Data
"While we remain USD bulls given the lack of real alternatives in the world, the game plan from here is to expect a flat to lower USD until US data shows signs of life," say TD Securities in a new note to clients. We find that this perfectly sums up the outlook for the Greenback over coming weeks.
With this in mind, the pound to dollar exchange rate (GBP-USD) slumped sharply lower on the 1st of May when it was shown the UK manufacturing sector had slowed sharply.
On the 6th we have seen the UK's largest economic segement - the services sector confirm it is growing at a strong page.
This contrasts to data received on the 5th where US trade data disappointed markets sending the USD lower.
UK Services PMI = Good for the Long Term Outlook of GBP
The longer-term outlook for pound sterling will ultimately be underpinned by the solid performance of the UK economy.
There were growing concerns that the economy is slowing down with indications that both construction and manufacturing are easing back.
However the largest segemenet of the UK economy, the services sector, has just given a positive surprise.
Markit and CIPS report that the April Services PMI read at 59.5, a solid beat on the 58.5 forecast.
“The services sector offered a more upbeat level of performance than the other sectors this month and demonstrated a continued assurance in the growth of the UK economy," says David Noble at the CIPS.
Missed Expectations in the US
US Services PMI for April by contraster were expected to read at 57.8 but came in at 57.4.
The big disappointment for the US dollar though was the release of March Trade Balance data which came in at -3.02BN USD, analysts had forecast -0.85BN USD confirming this to be a massive miss.
The bottom line is economic data out of the US continues to disappoint and currency exchange markets will therefore continue to push back their expectations for the first Federal Reserve Interest rate hike of the upcoming rate raising cycle.
“During the US trading session, it was the dollar’s turn to come under pressure. The US trade deficit was much bigger than expected. The result was for an important part due to a jump in imports after the reopening of west coast ports. Even, so the large trade deficit will probably push Q1 US growth in contraction territory,” says Piet Lammens at KBC Markets.
The report put the dollar in the defensive across the board.
EUR/USD rebounded to the 1.1173 area and is currently trading at 1.1150.
“From a currency point of view, the Greek mini-crisis was again forgotten. Dollar and euro weakness keep each other in balance. Something to keep an eye on: the EUR/USD rebound occurred even as intra-EMU spreads widened sharply. So, more EUR/USD volatility might be on the cards in the days ahead. More are now counting down to the US non-manufacturing PMI,” says Lammens.
The pound sterling meanwhile largely ignored the publication of some worse-than-expected data out of the UK economy on Tuesday.
It was reported that UK construction PMI declined substantially more than expected from 57.8 to 54.2.
“Contrary to what happened on Friday after the publication of the measure of the manufacturing sector, the loss of sterling was limited and very short-lived,” notes Lammens.
The relative resilience of GBP to the data will largely be down to the small weighting of the sector to the broader economic picture.
Construction accounts for about 6% of GDP.
With the EUR performing well against most of its trading partners again, another positive set of European data today would push the move further and probably more so than a weaker set of data causing a pullback.
In EURUSD terms though it is likely to be limited either way as the focus of attention is going to be on the US payrolls on Friday.
"The weaker than expected ADP number yesterday has seen the US markets come under pressure across the board, with Oil and commodities also performing well. The market is now braced for a weaker US payroll number on Friday, so any upside surprise is likely to have more positive impact on the USD," say Lloyds Bank in a note to clients.