Downbeat data dampened BOE tightening odds, and it didn’t help that dollar strength also clobbered the British pound. Are Brexit jitters returning, too?
Trade and geopolitical updates
In the absence of any U.K. events on the economic calendar, it’s likely that the pound could take its cue from its counterparts or any geopolitical updates that impact market sentiment and dollar price action.
For one, anything related to Brexit tends to push pound pairs around, even if it’s just a minor update like last week’s rumor on Boris Johnson being urged to lead a pro-Brexit bus tour. By the looks of it, traders are still hesitant to bet on the British currency as the risk of a “no deal” Brexit looms.
One thing to watch out for is the talks between Brexit Secretary Dominic Raab and his EU counterpart Michel Barnier due to resume this week. PM May is also said to be prepping to release technical notices after these talks conclude later in the week.
Aside from that, Turkey’s economic turmoil and the trade spat between the U.S. and China also tend to spur big moves, so any headlines on major developments would likely affect risk sentiment and pound direction.
Last Week’s Price Review
The pound is the THE biggest loser of the week (as of 2 pm GMT), which means that the pound will soon mark its fifth consecutive week of net losses.
The pound tossed and turned on Monday but finally caught a bid during Tuesday’s Asian session.
There were no apparent catalysts, but short-covering after last week’s pound-bashing and preemptive positioning ahead of the U.K.’s jobs report are likely reasons.
Unfortunately for pound bulls, the U.K.’s latest jobs report was a bit disappointing. Sure, the jobless rate in the three months to June fell from 4.2% to 4.0%, which is the best reading “since December 1974 to February 1975.”
However, I highlighted in Tuesday’s London session recap that:
“[A]verage weekly earnings only grew by 2.1% year-on-year in June, which is the worst reading since July 2017. And the three-month average comes in at 2.4%, missing expectations that it would hold steady at 2.5%.”
“On a slightly happier note, the weaker headline reading in June was due to the 6.6% slump in bonuses paid. If bonuses are stripped to get regular earnings, then average weekly earnings actually increased by 2.8%, which is a three-month high.”
“But on another downbeat note, real wage growth (inflation is taken into account) fell by 0.1% year-on-year in June, which the first negative reading in seven months.”
Aside from poor wage growth, market analysts were also pointing to Greenback strength as another reason for the pound’s weakness.
And as mentioned in Wednesday’s London session recap, market analysts were once again blaming Greenback strength for the pound’s slide since the U.K.’s CPI report was within expectations and was therefore a dud.
It’s worth noting, however, that the 2.5% year-on-year increase is below the BOE’s own forecast that CPI will increase by 2.6% in July, as laid out in the BOE’s August 2018 Inflation Report.
At any rate, the Greenback began to encounter sellers during Wednesday’s U.S. session, so the pound eventually found support and began trading sideways on most pairs before becoming more mixed during Thursday’s Asian session.
The pound’s price action became uniform again when GBP pairs drifted uniformly lower during Thursday’s London session, despite a better-than-expected retail sales report.
But then again, I noted in Thursday’s London session recap that the retail sales report implied that stronger sales may only be temporary because of the World Cup and good weather.
I also noted in the London session recap that market analysts were blaming the pound’s slide to the usual suspects, namely growing concerns over a “no deal” Brexit and the Greenback’s overall strength.
The pound’s price action then became mixed again when Thursday’s U.S. session rolled around. Most GBP pairs were range-bound, though.
The pound would get a final bearish kick when during Friday’s morning London session. And as noted in Friday’s London session recap, there was no apparent reason for that.
Well, the pound’s slide did somewhat coincide with a report claiming that former Foreign Secretary Boris Johnson was being urged to lead a pro-Brexit bus tour. However, that’s not really market moving. And besides, the report also cited an unnamed source as saying that Johnson has no plans to go on a bus tour.
In any case, that final bearish kick also pushed GBP/AUD below last week’s closing prices, which is why the pound’s the biggest loser of the forex bunch.
The trading week’s not over yet, though, so the pound still has a chance to improve its ranking. However, the odds for the pound to end up being a net winner seems rather low.