The British pound, which has so far outperformed its major rivals in 2019, has found renewed strength over the past couple of days.
At the time of writing, the GBP/USD was hitting new highs on the week at 1.3075, while the EUR/GBP was also not too far off its weekly low at 0.8586 hit earlier in the day. The likes of the GBP/JPY, GBP/AUD and GBP/CAD all rallied yesterday and were again in the positive territory when we went to press.
There is no clear catalyst behind the pound’s upsurge, but we reckon it is partly due to investors continuing to price out the prospects of a messy exit from the EU, after the parliament rejected a no-deal Brexit earlier this year.
It remains to be seen how the pound will react going forward, given that it faces key tests from both sides of the pond this week, with the FOMC decision looming later this evening, the Bank of England’s Super Thursday tomorrow and the always-important US monthly jobs report coming up on Friday.
Brexit latest
There’s no major update on the Brexit situation. Although Labour's governing body has rejected the idea of campaigning for a second referendum under all circumstances, it has nonetheless agreed to support one if it cannot get changes to the government's Brexit deal or an election.
The prospect of another referendum means there is still a very small chance that Brexit might not happen at all, or if it does eventually happen, it won’t be the worst-case scenario in terms of its impact on the economy with all political parties being against a no-deal Brexit.
Good news from UK retailers
The pound being higher today may also be due to the fact UK retailers Next (LON:NXT) and Sainsbury's (LON:SBRY) reported better-than-expected numbers, suggesting that the retail sector is not doing too badly given the circumstances – although this could have been due to unusually warm weather over the Easter holiday.
In terms of macro data, the latest UK manufacturing PMI printed 53.1 as expected, although this was lower compared to 55.1 recorded in March. Meanwhile, the Bank of England reported that Mortgage Approvals fell to 62,000 in March versus 64,000 expected and 65,000 the month before. However, despite this, Net Lending to Individuals climbed to £4.7 billion, higher than £4.5bn expected and last.
Looking ahead: FOMC, BoE and NFP
The GBP/USD will come into sharper focus given that we have the Federal Reserve’s rate decision this evening, the Bank of England’s Super Thursday (as well as UK Construction PMI) tomorrow and the US monthly jobs report (and ISM services PMI) on Friday.
- Today’s FOMC meeting is more likely to provide an update to how the Fed is viewing the US economy, rather than any immediate changes to monetary policy, as my colleague Matt Weller wrote in his FOMC preview yesterday. Recent US data suggests the world’s largest economy has remained relatively strong with the unemployment rate approaching a 50-year low, but inflationary pressures have remained soft. All told, however, we may not get any hints over a potential rate cut this year, meaning the markets’ reaction might be subdued this evening.
- The BoE’s updated inflation and growth forecasts in the Quarterly Inflation Report and Governor Mark Carney’s press conference has the potential to move the pound sharply, although with focus being squarely on Brexit, we doubt that it will be a super day for volatility. But then Carney has surprised us before.
- As far as the US non-farm payrolls is concerned, the headline jobs growth surpassed expectations last month but wages data disappointed. The dollar could come under further pressure if the jobs and/or wages data disappoint expectations this time. Meanwhile, the ISM services PMI will be published after the jobs report is out of the way.
It will be interesting to observe how the pound will behave going forward, but so far this year, it has clearly outperformed its major rivals as can be seen in figure 1, below.
Technical: GBP/USD approaches resistance ahead of key events
From a technical point of view, the bulls would be encouraged by the pound’s desire to climb back above the $1.30 handle, despite the US Dollar Index (DXY) breaking to a new 2019 high above 98.00 last week. This is a bullish sign in that it shows relative strength for the pound, as the GBP/USD is comfortably above its 2019 low of 1.2442.
At its weakest point last week at just below 1.2900, the cable had only shed half of this year’s gains. In contrast, the DXY broke to a new high last week, clearly suggesting that like likes of the EUR/USD has underperformed the GBP/USD. Indeed, the EUR/GBP cross is not too far off its 2019 lows currently.
Anyway, the cable has now broken back above its corrective bear trend and the 200-day moving average, as can be seen on the daily chart. As things stand, therefore, the path of least resistance is to the upside. Perhaps it would be more encouraging if the GBP/USD were to rise above its most recent high at 1.3135 level.
But with the aforementioned fundamental events to come, things could change quickly. Indeed, the GBP/USD approaching a key short-term resistance just below 1.3080. This level was support in the past. So, a potential pullback here should not come as surprise. Overall, though, it would require a move back below old resistance at 1.3020 for the short-term trend to turn bearish again.
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