"Noisy" Week for Pound Sterling Begins with Losses

© John Gomez, Adobe Stock

The British Pound is under pressure at the start of the new week - why, and can we expect the selling pressure to continue?

Sterling was one of the worst-performing major currencies at the start of a new week that promises to be laden with risks.

Traders have taken some Sterling off the table with an eye on Brexit negotiations and a key Bank of England meeting due on Thursday.

However, the Pound's poor performance was in part triggered by a softer-than-forecast data release in the form of the IHS Markit Services PMI for January which read at 53.0, which is disappointing considering markets were looking for a reading of 54.1.

This comes after both earlier surveys of the construction and manufacturing industries pointed toward slower activity for the month of January which suggests the economy did not start the year off on a strong note.

"This meant that the all-sector PMI dropped from 54.7 to 53.2 and on the basis of past form, points to quarterly GDP growth of about 0.3%, much lower than Q4’s 0.5% outturn," says Paul Hollingsworth, a senior UK economist at Capital Economics.

The data is however almost certainly not the reason for Sterling's big fall, in fact data is in the backseat when it comes to the Pound these days.

Rather, event risk in the form of the Bank of England and Brexit negotiations are to be watched.

"Looks like it'll be a noisy week for the pound given that you have crunch Brexit talks on top of the Bank of England meeting. Feels like today's fall in GBP may be a bit of de-risking," says analyst Viraj Patel with ING Bank in London. "But look through this noise - events this week unlikely to alter $GBP fundamentals."

The Bank of England will update markets on Thursday mid-day with their thinking on the latest economic trends and whether they see an interest rate rise as being necessary in coming months.

Many in the market are expecting a 0.25% rate rise as early as May - should these intuitions be confirmed then Sterling could well move higher. If Bank of England governor Mark Carney plays down such an outcome, Sterling could well sink.

Regarding Brexit, chief EU negotiation Michel Barnier will be in London for talks this week with his opposite number, David Davis.

Looking forward to catching up w/ @DavidDavisMP on Monday to discuss UK's orderly withdrawal, and meet w/ @EBA_News on #Brexit preparedness of EU financial service providers. Next EU/UK negotiation round starts on Tuesday in Brussels: pic.twitter.com/KMKlsrkQQ6

— Michel Barnier (@MichelBarnier) February 2, 2018

Barnier will round off the week with a press conference which will update markets on how the second phase of negotiations are progressing. An upbeat message will help Sterling.

At the time of writing the Pound-to-Euro exchange rate is quoted at 1.1292 and should the pullback not extend too far, Sterling is to remain favoured we are told.

"Little damage has thus far been done by a recent secondary rejection around 1.1500 but the relatively shallow angle of ascent from an intermediate standpoint is also limiting upside potential here at present," says Lucy Lillicrap with AFEX.

The Pound-to-Dollar exchange rate is quoted at 1.4049 and the key level here is the round number at 1.40; "the response of GBP prices to resistance above 1.4300 looks corrective in broad terms bu additional reaction or at least re- consolidation is nonetheless envisage before broader uptrends resume," says Lillicrap.

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