Sterling slipped below 1.3 for the first time since July 12 following comments from BoE’s Ian McCafferty that more easing is likely to be required if economic conditions deteriorated. Today marks the fifth consecutive day of declines on pound and the longest losing streak since the Brexit vote, but the currency remains well above its three-decade low of 1.2796. For GBPUSD to test new lows, it will require many negative shocks from U.K.’s economy, especially as much of the skepticism is already priced in the currency, which was reflected in CFTC’s data showing sterling net short contracts surging to a record high of 82,515 in the week ended August 2. Today’s industrial and manufacturing data are not likely to reflect the weakness seen in PMI’s as data was taken prior to the Brexit vote, which suggests a short squeeze could lead GBPUSD higher from current levels in the short run.
The dollar index continued to gained ground after falling by 2.5% from July 22 to Aug 2. The strength in the greenback is still driven by the robust employment report on Friday which showed U.S. economy added 255,000 jobs in the month of July which sent rates higher across the U.S. yield curve. Although markets are still not convinced that the Fed will hike rates in September or December, the fact that it’s the only major central bank not considering easing monetary policy will continue to support the dollar.
In the next 24-hours focus will shift to the Kiwi. NZDUSD has been moving in a range of less than 100 pips despite expectations that RBNZ is set to follow steps taken by Bank of England and Reserve Bank of Australia in cutting rates by 0.25% on Thursday. In fact, a rate cut alone is not enough to send the Kiwi lower for two reasons. First, the news is already priced in the currency and second, a 2% interest rate will remain the highest among major central banks. So unless the central bank indicates further easing measures in the foreseeable future, expect the NZD to continue benefiting from carry trades.