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GBP/USD edges higher after U.K. data but gains capped
The pound edged higher against the U.S. dollar on Friday, after data showed that U.K. service sector expanded at a faster rate than expected this month, although gains were capped by ongoing concerns over the Greek debt crisis.
Trading volumes were expected to remain thin with U.S. markets closed for a national holiday.
GBP/USD hit 1.5639 during European morning trade, the session high; the pair subsequently consolidated at 1.5623, adding 0.10%.
Cable was likely to find support at 1.5559, Thursday's low and resistance at 1.5736, the high of July 1.
Markit research group reported on Friday that the U.K. services purchasing managers' index rose to 58.5 in June from 56.5 the previous month, beating expectations for an uptick to 57.4.
But investors remained cautious as hopes for a last minute deal between Greece and the euro zone were quashed on Wednesday after Greek Prime Minister Alexis Tsipras urged voters to reject the terms of an international bailout deal.
Greek voters are due to decide on Sunday whether to accept terms proposed by the institutions overseeing the country’s now-expired bailout, the European Central Bank, the International Monetary Fund and the European Commission, or reject them.
Greece became the first developed country to default on the IMF after its second bailout program expired late Tuesday.
Meanwhile, sentiment on the dollar remained vulnerable after a string of disappointing U.S. data on Thursday fuelled uncertainty over the timing of a rate hike.
The U.S. Commerce Department reported on Thursday that factory orders fell 1.0% in May, compared to expectations for a 0.5% decline.
Separately, the Labor Department reported that the economy added 223,000 jobs in June, compared to expectations for jobs growth of 230,000.
Data also showed that the number of individuals filing for initial jobless benefits in the week ending June 27 increased by 10,000 to 281,000, compared to expectations for a 1,000 fall.
Sterling was lower against the euro, with EUR/GBP edging up 0.14% to 0.7111.
Also Friday, Markit said that Germany's services PMI ticked down to 53.8 this month from 54.2 in May, confounding expectations for an unchanged reading.
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UK Preview: Factory Output and Trade Balance to Hint at Q2 Growth
The UK industrial production, including extraction of oil and gas from the North Sea, is expected to have declined 0.4% between April and May, after rising the same amount a month before. The latest official data showed industrial output picked up in April, mainly due to an increase in global oil demand, which translated into stronger oil and gas extraction. The Office for National Statistics is releasing the figures next Tuesday.
Downbeat factories
The manufacturing sub-sector, however, experienced a marked setback in April, when output decreased unexpectedly by 0.4% due to a sudden plunge in pharmaceutical products. In May, economists expect factories' production to have rebounded slightly by 0.1%.
The latest Markit/CIPS PMI indicator showed UK manufacturers continued to struggle in the second quarter as business activity decelerated unexpectedly in June, while the whole second quarter was the weakest since Q1 2013. This dents the hopes of the economy rebounding more broadly from a sudden slowdown in the first quarter. Feedback to Markit survey also revealed that a stronger pound against the euro and a continuing crisis in the euro zone weighed on production. This was partially offset by stronger domestic demand.
In its June summary of business conditions, the Bank of England (BoE) said manufacturing output growth had edged higher for the domestic market, while growth in goods exports had remained subdued overall. "For some, euro-area economic conditions and sterling’s rise against the euro had led to a decline in European sales volumes, although the effect had been more pronounced for sales values," the BoE said.
Manufacturing is also the sector where wages have been growing at the slowest pace. While the weekly earnings in the services sector rose some 2.9% in the quarter to April, manufacturers saw their pay ticking up only 1% during the same period, and 0.7% in the previous quarter.
NIESR
Also on Tuesday, the National Institute of Economic and Social Research (NIESR) is releasing its GDP estimate for the second quarter. The latest NIESR estimate suggested the UK economy rebounded 0.6% in the three months to May, after an upwardly revised 0.5% in the quarter to April. NIESR also projected annual GDP growth of 2.5% in 2015 and 2.4% in 2016.
Rift at BoE looms
Market participants will then be focusing on the BoE rate and QE announcement, due next Thursday. It is very likely the central bank leaves its monetary policy stance unchanged in July – the base rate will stay at the record low of 0.5% and QE volume at £375 billion. Based on the most recent speeches and interviews by the BoE rate-setters, we can expect a rift between doves and hawks to come as early as the summer's end.
BoE policymaker Martin Weale told the Financial Times on June 23 that the Bank of England should be ready to start raising the base interest rate as early as in August this year as the labor market continues to tighten markedly.
Weale is viewed as one of the most hawkish members of the BoE's Monetary Policy Committee (MPC). Weale, together with policymaker Ian McCafferty, was voting for an interest rate hike between August and December last year, before the pair dropped their vote when inflation was falling sharply down below the 2% target.
Weale's colleague at the MPC Andrew Haldane is much less enthusiastic about tightening the policy earlier than necessary. Haldane, who is the BoE chief economist and considered a dove among the BoE rate-setters, rejected calls for earlier rate hike in the most recent speech he gave at the Open University on June 30.
Haldane argued the most recent pick-up in wage growth is weak proof that domestically driven consumer price pressures are strong enough to push inflation up toward the 2% target in a two-year time period. "April's wage data was news, encouraging news … But one swallow does not a summer make ... Wage growth is causing some fluttering, but not in this dovecote," he said.
The general consensus among economists is that the BoE could start normalizing policy with a 25 basis points rate increase sometime in the first quarter of 2016, if inflation picks up as expected and the macro data do not disappoint notably.
UK industrial output May mm+0.4% vs -0.2% exp
Pounds gets a small boost from the better headline
Rally short lived as mftg production data negates stronger industrial headlines and market factors in the lower revisions
ONS says
Full ONS report here
GBPUSD back to 1.5537 from 1.5545 EURGBP 0.7068
source
GBP/USD: Cable Loses Nearly 2 Big Figures, Prints 1-Mth Lows
The US trade balance for May widened, but slightly less than anticipated, printing a deficit of $41.9 billion, while analysts had expected $42.7 billion. Moreover, the previous deficit was positively revised, from $40.9 billion to $40.7 billion. The dollar did not move much after the release, but remained at daily highs against the pound.
"The details of the report were broadly mixed, as export activity was driven lower by the 5.2% m/m decline in capital goods demand. Goods exports slowed 1.3% m/m, which more than compensated for the 0.2% m/m rise in service export. On the import side, falling petroleum demand was the key factor pushing the import bill lower as the 10%+ plunge in the number of barrel of oil imported more than offset the 9% rise in prices. Beyond petroleum, import demand for food (down 3.5% m/m) and capital goods (down 1.5% m/m) were lower," Millan L.B. Mulraine, US strategist at TD Securities wrote in a note on Tuesday.
During the US session, cable was seen dropping toward the $1.54 handle, nearly 200 pips lower on the day, with the dollar trading broadly higher, except against the yen.
Wednesday's FOMC minutes might offer further insight into the Fed's monetary policy and will be closely watched as the FOMC statement released at June's meeting was rather dovish.
Moreover, the dot plot suggested that most of the governors expect only one rate hike this year, which leaves the September meeting out of play, and the chart also revealed a slower pace of the hiking process in 2016 than previously anticipated.
Industrial production in the UK for May ticked higher to 0.4% from April's 0.3% month-on-month, while manufacturing production declined from -0.4% to -0.6% for the same month and period, the Office for National Statistics advised on Tuesday.
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GBP/USD: Cable at Daily Lows, Unimpressed by Osborne's Report
K Chancellor George Osborne said that the 2015 - 2016 deficit is seen at 3.7%, while the 2016-2017 deficit is expected at 2.2% and GDP in 2016 should grow 2.3% percent. Furthermore, around one million job vacancies are forecast over the next five years.
As none of this information was new and he said nothing groundbreaking, sterling did not move much and remained at daily lows against the greenback, trading around $1.5380.
Traders will now focus on tonight's FOMC minutes, which might offer further insight into the monetary policy and will be closely watched as the FOMC statement released at June's meeting was rather dovish.
Moreover, June's dot plot suggested that most of the governors expect only one rate hike this year, which leaves the September meeting out of play, and the chart also revealed a slower pace than previously anticipated for the hiking process in 2016.
On Tuesday, industrial production in the UK for May ticked higher to 0.4% from April's 0.3% month-on-month, while manufacturing production declined from -0.4% to -0.6% for the same month and period, the Office for National Statistics advised on Tuesday.
"It appears that manufacturers are currently being particularly constrained by weakened foreign orders, which is at least partly a consequence of sterling’s strength against the euro," Howard Archer, chief European & UK economist at IHS Economics believes.
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Preview: Rift at BoE Looms
Market participants will be focusing on the BoE rate and QE announcement on Thursday. It is very likely the central bank will leave its monetary policy stance unchanged in July – the base rate will stay at the record low of 0.5% and the QE volume at £375 billion. More details will be revealed in the MPC minutes due on July 22.
Based on the most recent speeches and interviews by BoE rate-setters, we can expect a rift between doves and hawks as early as the summer's end.
BoE policymaker Martin Weale told the Financial Times on June 23 that the Bank of England should be ready to start raising the base interest rate as early as in August this year as the labor market continues to tighten markedly.
Weale is viewed as one of the most hawkish members of the BoE's nine-strong Monetary Policy Committee (MPC). Weale, together with policymaker Ian McCafferty, had voted for an interest rate hike between August and December last year, before the pair dropped their vote when inflation was falling sharply down below the 2% target.
Weale's colleague at the MPC, Andrew Haldane, is much less enthusiastic about tightening the policy earlier than necessary. Haldane, who is the BoE chief economist and is considered a dove among BoE rate-setters, rejected calls for an earlier rate hike in the most recent speech he gave at the Open University on June 30.
Haldane argued that the recent pick-up in wage growth is weak proof that domestically-driven consumer price pressures are strong enough to push inflation up toward the 2% target in a two-year time period. "April's wage data was news, encouraging news … But one swallow does not a summer make ... Wage growth is causing some fluttering, but not in this dovecote," he said.
The general consensus among economists is that the BoE could start normalizing policy with a 25 basis points rate increase sometime in the first quarter of 2016, if inflation picks up as expected and the macro data do not disappoint notably.
According to the latest estimate by the National Institute of Economic and Social Research (NIESR), economic performance in Britain improved and spare capacity continued to be absorbed in the second quarter, with the quarterly rate of GDP estimated to have accelerated to 0.7%, up from 0.4% in the first three months of this year.
NIESR therefore expects the Bank of England "to begin increasing Bank Rate in early 2016, most likely coinciding with the February Inflation Report." Also, a slower pace of fiscal adjustment, announced by Chancellor George Osborne on Wednesday, should allow the Bank of England to tighten policy more
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BoE Leaves Policy on Hold Amid Mixed Data, Greek Drama
The Bank of England (BoE) base interest rate has been stuck at the record low of 0.5% since March 2009, when the central bank introduced extraordinary measures to spur demand following the 2008-09 financial crisis. The volume of the asset purchase facility was left unchanged at £375 billion.
The BoE has been keeping policy on hold since then, with the point in time approaching slowly when interest rates will eventually have to increase, albeit very slowly and more gradually than in the past.
The majority of economists expect the first round of rate increases to come sometime in the first quarter of 2016, if inflation picks up as expected and macro data do not deteriorate markedly, with some of the MPC hawks expected to raise their hands to endorse a hike as early as in August.
A common stance among economists is that the BoE will be tightening policy with 25 basis points each rate hike. But given the policymakers' constant reiteration on gradualism and a slower tightening process, analysts at the Bank of America Merrill Lynch argued the MPC might as well start the tightening cycle with a 10 basis-point hike instead.
"We see several compelling reasons why it might be considered and expand upon our original case inside. A small and tentative first increase might plot a careful course between compelling but competing economic arguments and minimize the risk of what we call a 'Bayesian shock' accompanying the first rate increase," economists at the Bank of America Merrill Lynch suggested in one of their latests 'Liquid Insight' reports.
The above argument would make sense given the BoE top officials stressing constantly that it is not so much about the timing of the first hike, but rather about the actual path of rate rises that follows. That path will be much smoother, slower, and more gradual than in the previous tightening cycles, with rates staying lower for much longer than was common practice before the crisis.
A slower tightening process also makes sense when the UK economy remains fragile and highly unbalanced, while turbulences in the euro zone and Greece add to this fragility and exposure to spill-overs and wider shocks.
July's policy announcement is also the last one before the BoE introduces new communication procedures as of this coming August, when the announcement, MPC minutes and, in the case of the August data cycle, the quarterly Inflation Report will be announced on the same day.
With years of ultra-easy monetary accommodation coming to an end in the foreseeable future, the BoE needs to provide the markets with much clearer and comprehensive messages to eliminate speculations and rumors.
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GBP/USD rises on upbeat U.K. trade report
The pound rose against the U.S. dollar on Friday, after data showed that the U.K. trade deficit narrowed unexpectedly in May and as hopes for a Greek debt deal lent support to riskier assets.
GBP/USD hit 1.5455 during European morning trade, the pair's highest since Wednesday; the pair subsequently consolidated at 1.5450, gaining 0.47%.
Cable was likely to find support at 1.5327, the low of July 8 and resistance at 1.5554, the high of June 10.
The U.K. Office for National Statistics reported on Friday that the trade deficit narrowed to £8.00 billion in May from £9.39 billion in April, whose figure was revised from a previously estimated deficit of £8.56 billion.
Analysts had expected the trade deficit to widen to £9.70 billion in May.
At the same time, market sentiment improved after Greece offered to make painful spending cuts and hike taxes late Thursday, in a last-ditch request to win one more bailout from Europe before the country descends into bankruptcy.
Athens was seeking at least €50 billion over the next three years. In exchange, the government presented a number of austerity measures that were said to total between €12 billion and €13 billion - significantly more than Greece’s previous commitments.
The move brought Greece one step closer to a deal with its European creditors, who plan to make a final decision Sunday about whether to grant the country additional emergency loans.
In the meantime, the Greek government extended bank closures and the €60 daily limit on cash machine withdrawals until Monday.
Sterling was lower against the euro, with EUR/GBP adding 0.18% to 0.7189.
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GBP/USD forecast for the week of July 13, 2015
The GBP/USD pair had a pretty volatile week, testing the 1.55 level from all directions. Ultimately though, we ended up forming a hammer, which of course is rather positive. If we can break the top of the hammer, we feel that the market will then test the 1.58 level, and then head towards the 1.60 level. We believe that the British pound will continue to strengthen overall, and as a result are very bullish. We have no interest whatsoever in selling this pair, as we believe that the “floor” in this market is at the 1.52 handle.
GBP/USD weekly outlook: July 13 -17
The pound rose against the dollar on Friday as hopes for a deal to avert a Greek exit from the euro zone and rebound in Chinese shares bolstered investor confidence.
GBP/USD hit highs of 1.5551, the most since July 7, before pulling back to 1.5494 in late trade, ending up 0.79% for the day.
Hopes for a breakthrough on a new bailout deal for Greece were boosted after the government put forward new proposals on budget cuts and economic reforms ahead of a meeting of the euro group of finance ministers on Saturday.
The pound was lower against the euro, with EUR/GBP up 0.18% to 0.7186 late Friday, after rising as high as 0.7224 earlier.
Risk appetite was also boosted as Chinese equity markets gained for a second day on Friday, recovering from a steep plunge earlier in the week as emergency steps taken by the government helped stabilize markets.
Sterling pared back some gains against the dollar after Federal Reserve Chair Janet Yellen said the central bank was on track to raise interest rates at some point this year.
She added that she felt an initial rate hike will have a small impact and reiterated that rates would rise only gradually.
In the week ahead, developments in Greece look likely to continue to dominate sentiment after talks between euro zone finance ministers on a third bailout for Greece ended without an agreement on Saturday.
European Union leaders were to hold another summit meeting on Sunday.
China is to release data on second quarter growth, while monetary policy statements by the European Central Bank and central banks in Japan and Canada will also be in focus.
Ahead of the coming week, Investing.com has compiled a list of these and other significant events likely to affect the markets.
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