Forex trading resulted in the GBP/USD pair falling to its lowest value in three weeks on Jan. 15, and this decline happened as global markets responded to key reports that provided insight into economic conditions in both the United States and the United Kingdom.
The GBP/USD declined to as little as 1.6323, Reuters reported. This represented the lowest value for the currency pair since Dec. 20. The exchange rate for the two later recovered, rising to 1.6351.
American Manufacturing Data Strong
The currency pair dropped to a three-week low after global market participants responded to the latest information pointing to strength in the U.S. economy, including a report which indicated that thus far in January, manufacturing activity in the New York region has been strong, according to Investing.com. In addition, the results exceeded the expectations of analysts.
While market experts had predicted that the general business conditions index would rise to 3.75, it ended up increasing to 12.51, the media outlet reported. This jump was significant, as the measure had a reading of 2.22 during the prior month.
While factory activity ticked higher, additional data revealed that in December, producer prices rose sharply, according to the news source. During the period, the measure of these expenses increased by 0.4 percent. After falling by 0.1 percent in November, producer price inflation experienced its sharpest monthly gain since June.
It is important to note that while data released for the U.S. indicated a strong increase in this particular measure of inflation, separate figures provided for the United Kingdom indicated that consumer prices rose rather slowly in December, increasing 2 percent from the same time in 2012, Reuters reported.
BOE Policy Speculation
As a result of this modest rise in the price level, the Bank of England has less incentive to increase its interest rates soon, according to the news source. It is important to note that the strength of the job market in the European nation has also been cited as being a crucial matter that has an impact on the policy decisions of the country’s central bank.
The BOE is expected to hold off on increasing its benchmark borrowing costs, as the recent data indicating that inflation is not a huge concern should give the financial institution greater flexibility in terms of harnessing policy to stimulate the economy, Exchange Rates reported.
In addition, there may be good reason for the country’s central bank to continue to keep its rates low, and possibly consider use of additional stimulus, since recent data has revealed that expansion in consumer credit has helped fueled the growth in gross domestic product in the United Kingdom, according to the news source.
Amid these concerns about the lackluster state of economic conditions in the European nation, the BOE has indicated that before it thinks about boosting interest rates, it has a goal of pushing unemployment to 7 percent, Reuters reported.
One person who is optimistic that this key level will be reached soon is Lee McDarby, who works for Nomura International as executive director, corporate FX sales, according to the news source. He predicted that halfway through this year, the nation’s jobless rate will fall below 7 percent. The market expert also noted the key impact that inflation has on the value of the GBP/USD.
“Sterling went a little soft after the recent CPI data,” he told the media outlet. “Given that U.K. data is now assumed to be solid, any blips could impact the pound. However, the CPI data does not fundamentally change the lie of the land.”
Bond Yields and GBP/USD
The currency pair could potentially rise in value in the near future, at least if the price of government bonds continues to increase, according to Exchange Rates. The yields on 10-year bonds released by the British government recently declined to their lowest since Dec. 3, and the financial instruments released by the nation’s government have been rising in value.
It is important to note that the strength of the GBP can frequently be inferred from the value of futures contracts related to these debt-based securities, the media outlet reported. Since bond yields have fallen lately, it makes it easier for the government to refinance debt. The expenses of the Treasury could be reduced in the long-term as a result of this development.
The BOE may soon have a greater wealth of economic information it can use to determine whether to make any changes to existing policy, as December retail sales data is scheduled to be released on Friday, Jan. 17, according to Reuters.
In addition to the impact that these economic figures could have on BOE policy, and therefore the GBP/USD, many economists have speculated that the financial institution might hold out before increasing interest rates by lowering the unemployment rate at which it is willing to increase these borrowing costs, the media outlet reported.
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