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The British Pound notched a weekly advance against the Euro but it was the Dollar that remains dominant in global FX, but two key economic reports could boost the UK currency if they beat expectations.
A mixed performance over the past week suggests investors are yet to be convinced the Pound is ready to put the sharp declines endured in the wake of the Bank of England's November policy decision behind it.
"The pound has settled above its recent lows vs. both the USD and the EUR, but it remains in a clearly weakened positioned," says Jane Foley, Senior FX Strategist at Rabobank.
Above: GBP's performance in the week ending Nov 12.
- Reference rates at publication:
GBP to EUR: 1.1718 \ GBP to USD: 1.3415
- High street bank rates (indicative): 1.1490 \ 1.3140
- Payment specialist rates (indicative: 1.1660 \ 1.3348
- Find out about specialist rates, here
- Or, set up an exchange rate alert, here
The Pound-Dollar exchange rate fell to new 11-month lows in the week past while the rebound against the Euro is not yet substantial enough to suggest the UK currency is about to enter a phase of major appreciation.
But, the coming week could see the UK currency build on its recovery if UK employment and inflation data come in ahead of expectations.
"A daunting week ahead for all things UK economics could see the pound sink or swim. Britain releases unemployment data Tuesday, inflation Wednesday, and retail spending on Friday. The BOE said it’s paying particularly close attention to the job market after the government ended a salary support program in September," says Joe Manimbo, Senior Currency Analyst at Western Union.
The Bank of England said on November 04 it would keep interest rates unchanged, a move that surprised a market that was expecting a hike of at least 15 basis points.
The key message was that they needed time to see how the labour market had responded to the ending of the government's jobs support scheme (furlough) in September. They judge that a robust labour market would mean spare capacity in the economy is likely to shrink sharply over coming months, posing upside risks to inflation.
Furthermore, the Bank cast doubt on the prospect of a December rate hike, meaning the odds of a February rate rise have since risen sharply.
Pound exchange rates have fallen back in tandem with this realignment in market expectations, but should expectations for a December rate hike build again then the Pound could find some support once more.
Expect odds for such an outcome to grow if Tuesday's employment data comes in stronger than expected: the market is looking for 180K jobs to have been created in the three months to September, less than the 350K created in the three months to August.
However, it is the October numbers that will be of most consequence and that is why we will be watching the claimant count to get a scale of how many more people signed for out of work benefits following the ending of the furlough scheme.
There is no consensus estimate for this number, therefore getting a gauge on the market reaction will take some time.
"Early evidence suggests there hasn't been a huge spike in redundancies now wage support has stopped. We are more likely to see some underemployment - perhaps early retirements or people working fewer hours than they'd like. But barring a huge negative surprise, recent comments suggest policymakers will proceed with a rate hike," says James Knightley, Chief International Economist at ING Bank N.V.
Above: GBP against the Dollar (top) and Euro (bottom) at weekly intervals.
The Dollar surged in the past week following the release of inflation data that was much hotter than had been expected as it implied the U.S. Federal Reserve might have to consider acceleration its plans for raising interest rates, a supportive outcome for the Dollar.
With this reaction function in mind keep an eye on the Pound on Wednesday when the UK's inflation data for October is released.
The market is looking for CPI inflation to rise 3.9% year-on-year in October, a sharp rise on the 3.1% recorded in September.
A beat on this expected figure would likely put pressure on the Bank of England in much the same way the Fed is feeling the heat of market expectations in the U.S.
A strong inflation print and job number will therefore both underpin the Pound's nascent recovery from its early November jolt lower.
However, any disappointments could see the market ensure the UK currency ends the coming week in tepid fashion and it could only be in early 2022 that Bank of England rate hike expectations begin to offer meaningful support once more.
"The outlook for GBP will be guided by expectations regarding the pace of BoE policy tightening relative to the policy decisions taken by other major central banks such as the Fed and the ECB," says Jane Foley, Senior FX Strategist at Rabobank.
The Pound to Euro exchange rate will start the coming week at 1.1718, the Pound to Dollar exchange rate will start the new week at 1.3415.
Analysis from investment bank Morgan Stanley finds that while the Pound-Dollar exchange rate lacks cheerleaders right now, negative sentiment against the UK currency might have gone too far.
They are watching upcoming data - notably next Tuesday's labour market statistics - to offer the chance for a recovery.
"We think risks are now skewed to the upside for GBP. Good economic data and hence higher real yields are a necessary condition for turning outright bullish, in our view," says Wanting Low, an analyst with Morgan Stanley in a research note released this week.
Low says "good economic data should push UK real yields higher, driving the next leg higher in GBP... if the growth and labour market data surprises to the upside, we think this will likely be GBP-positive."
But a disappointment could undermine any pro-GBP sentiment, making for a soggy end to 2021 for Sterling bulls.