Pound Falls from Best Exchange Rate of 2015 Against Dollar
The GBP powered to its best level against the USD for 2015 this week after it was shown UK workers are getting paid more and unemployment continues to fall.
However, the highs were not held for long as traders promptly booked profit on the GBP/USD following the Bank of England's Inflation Report in which it was indicated no interest rate rise was immintent.
Nevertheless, the pound to dollar exchange rate conversion remains just below 1.5800 - well above the lows seen at 1.45 recorded in mid-April. The recovery has offered relief to those looking to make payments denominated in dollars with their pound sterling.
As we noted in a previously published technical forecast note, recent break higher above 1.5330 has created a bullish signal and we could well see continued strength at these levels. Momentum indicators remain aligned in positive territory with the daily charts showing GBP-USD remains well above its 100 day moving average. However, the Relative Strength Index reads at 73 and is therefore indicating that the rally higher may have over-extended itself somewhat. Consolidation could well set in ahead of the weekend.
The Pound Today
The pound to dollar exchange rate (GBPUSD) rose to a best rate of 1.5815 on a combination of strong UK jobs data and poor US retail sales, it has since fallen back down to 1.5732. The pound to euro exchange rate (GBPEUR) hit 1.4015 before a deeper decline to 1.3824 owing to continued broad-based euro strength.
Beware. All quotes in this piece reference the inter-bank spot rate. Your bank transfer will affix a spread at discretion. Independent providers are however able to get you closer to the spot market rate, in some cases this can deliver up to 5% more currency. Find out more.
The Bank of England - Still on for a Rate Rise
Recent strength in the pound has been based on an interest rate possibly arriving late in 2015, recent strong data has suggested the UK economy may be ready for a rise. The Bank sees its differently though and advised in their May Quarterly Inflation Report that they are lowering their growth profiles for the UK economy, economic growth was lower from 2.9% to 2.5% for 2015.
However, in the press conference that followed the release of the Inflation Report Governor Carney confirmed that the they are expecting inflationary pressure to pick up. Carney said the Bank believes the UK consumer holds similar expectations and that there is no evidence that purchases are being delayed.
This is a pro-GBP observation as it indicates that the Bank will not delay a rate rise based on current inflation, rather rises will come in anticipation of a pick-up in the inflation rate.
It was also mentioned that current economic forecasts and interest rate decision making is factoring in a stronger pound. The pound's recent strength is believed to be an inhibitor of export activity and as such we get the sense that the Bank would be happy to delay interest rate rises if it meant keeping the pound capped.
The Data
Driving the pound sterling higher in May has been the eradication of political uncertainty and consistently strong economic data. Many had warned of a slowdown in activity - while this has certainly been proved in some data releases it has not been as deep as many had feared.
Traders boosted their exposure to sterling ahead of the Inflation Report after the Office for National Statistics confirmed wages are increases at a faster-than-expected pace. The amount of people claiming unemployment benefits also fell by 12 000 in March in signs that the economic recovery remains steady.
Labour market figures were generally positive, however the news that the Claimant Count fell by 12.6K in March will disappoint as markets had expected a higher number to find work at 20K.
Nevertheless, it is arguably wage growth that matters more to the decision makers at the Bank of England who want to see signs that the economic recovery is reaching people’s pockets. Average Earnings Index +Bonus (Mar) increased by 1.9%, ahead of the 1.7% increase expected.
The strong wages data follows hot on the heals of similarly impressive Industrial and Manufacturing figures released by the ONS a day earlier. It was shown that the expected slowdown to the UK’s economy may have been over-exaggerated.
There are political implications behind the jobs figures. “Chancellor George Osborne will be rubbing his hands at today’s news of rising earnings and reductions in unemployment, which put him in a good position following the general election,” says Dennis de Jong, managing director at UFX.com.
“After five years of doing a credible job despite being hamstrung by the coalition, George now has a free rein to implement his plan and slay the dragon of economic uncertainty, turning these tentative positive steps into substantial improvements in the coming months.”
From a currency perspective it is hard to argue that the economy is not ready for an interest rate cut, all signs point to strong underlying fundamentals.
US Dollar Suffers
Driving the GBP/USD strength on Wednesday/Thursday was the release of some sub-par retail figures out of the US economy. Retail sales were flat, confirming that the economy is yet to full emerge from the slowdown delivered by a harsh winter.
“The US economy looked to be back on track last week with the positive non-farm payrolls report, but tepid wage growth is having a continued negative impact on consumer spending," notes Dennis de Jong at UFX. “The harsh winter caused retail sales to suffer and, even though the sun is now out, it clearly hasn’t warmed the purses and wallets of the US citizens.
de Jong believes Janet Yellen will remain confident that the Fed is on the right path, but there are still plenty of obstacles to manoeuvre around over the coming months.
For the USD to arrest its losses against the pound sterling we would need to see some better-than-expected data releases delivered in coming weeks. For a currency market now obsessed with economic data we would expect GBP/USD to maintain the advantage until this scenario is achieved.
