Cable has been under pressure over the last few days, but might have found a bottom, depending on what happens with the key upcoming data. The catalyst for the move can be attributed to a stronger dollar, as markets anticipate that the Fed will hike rates faster than the BOE.
Britain’s central bank is constrained in action compared to the Fed as the UK economy remains sluggish. Chancellor John Healey gave a noted speech at the Labour Party Conference and ahead of announcing his much anticipated first Budget. He talked about the need to reinvigorate the economy, and to boost employment. The latter has been a key issue of concer for the BOE. However, his intentions might be marred by the reality of Britain’s financial situation, and further upside to the pound might rely on a surprise in the data.
Hedge Fund Flows and Data Outlook
On the technical side, an short-term explanation for why the GBPUSD hit multi-month lows last Friday is heavy selling by discretionary hedge funds. The pair has managed to stage a recovery at the start of the week, suggesting the selling was temporary. The exact amount hasn’t been reported, but the phenomenon was noted by JPMorgan in a note to traders, tying it to concerns around the potential for a US ban on diesel fuel exports.
On the other hand, it’s a data-heavy week, ahead of China’s Golden Week, which could suppress trading volumes. The hedge funds’ activity might be more related to preparation for upcoming risk events, including UK GDP and US PCE data, both of which are likely to affect the GBPUSD ahead of Friday’s payroll data.
What the Market is Looking For
On Wednesday, UK final Q2 GDP wis expected to confirm a declaration to 0.4% from 0.6% growth in the first quarter. While headlines might point to the annula rate accelerating to 1.2% from 0.9% three months ago, the quarterly reading is likely to be more relevant to the BOE’s outlook.
A cooling economy makes it harder to justify interest rate hikes, which could leave the BOE on hold until Q3 data comes in. In the meantime, traders will be watching mortgage lending on Tuesday, as well as the gilt auction a few hours later. Traders will be particularly concerned if there is a notable increase in the interest rate from 5.16% in the prior auction. A slow down in lending and continued shrinking of the M4 money supply all make the case for keeping rates unchanged.
What Could Move the Market?
The balance of risk that might move cable this week is largely on the American side, with the currency pair likely to be more affected by moves in the dollar. However, the recent selling by hedge funds shows that the pair is still vulnerable to UK side risks, and those largely revolve around economic growth indicators.
Many analysts believe that a US ban on diesel exports is unlikely, the fickle nature of the Trump Administration does leave it as a distinct possibility. That could substantially weaken the pound more than the any of the major data releases. It would likely take across-the-board beats in the UK data to substantially push the GBPUSD higher.
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