GBP/USD, or British pound to US dollar, is a major currency pair, meaning it is heavily traded in forex markets. While the pound tends to reflect the underlying strength of the UK economy, it also tends to track the euro given the UK's significant trading relationship with the Eurozone. Similar to EUR/USD, GBP/USD tends to rise during economic booms while selling off sharply during downturns. For example, GBP/USD sold off sharply during the 2008 financial crisis and after the Brexit referendum. In 2017, the pair rallied as the world enjoyed a period of strong economic growth.
The British pound is currently slightly higher against all major currencies except the euro and the Australian dollar. Yesterday, the pound ended the day down sharply against the US dollar. Yesterday's sell-off was accompanied by accelerating trading volumes in British pound futures, which were higher relative to both the previous session and 30-day averages. The combination of a sharp move lower and higher volumes suggest that traders sold the currency with conviction. Today's GBP/USD trading range is 1.2920 - 1.3260.
Thanks to a combination of slowing retail sales data, concerning Brexit headlines and pressure on the euro, the pound had plenty of reasons to weaken yesterday. Starting with the data, year-over-year retail sales growth slowed to 3% in September. The figures were disappointing as comparable retail sales at this point last year were slowing in rate-of-change terms. As consumption is a significant component of the U.K.'s economy, slowing retail sales have broader implications for economic growth in the third and fourth quarter of this year.
Turning to Brexit developments, the pound sold off sharply yesterday after Theresa May said that the EU's proposal on the border was unacceptable. May also suggested that she would be willing to extend the transition period "for a matter of months" in order to address ongoing differences. Earlier today, sterling ticked up following Michel Barnier's comments saying that a Brexit deal was 90% complete. Barnier did, however, suggest that the Irish backstop issue remains a significant roadblock. As trade negotiations remain volatile, Brexit-related news continues to have a significant impact on the pound in the short term.
Lastly, the pound is likely to remain under pressure thanks to slowing growth in the Eurozone. As described in today's euro daily update, Italian debt concerns continue to weigh on the common currency. Given the U.K.'s significant trading relationship with the Eurozone, the pound is closely correlated to the euro. Our outlook on the pound remains bearish.
GBP/USD is currently above 1.3050. EUR/GBP is up slightly, with the pair trading above 0.880. The pound is down against the Australian dollar and up against the Canadian dollar. GBP/AUD is currently above 1.8260, while GBP/CAD is above 1.7080.
|October 16||Claimant Count Change SEP||18.5K||14.2K|
|October 16||Unemployment Rate AUG||4%||4%|
|October 16||Average Earnings excl. Bonus AUG||3.1%||2.9%|
|October 16||Average Earnings incl. Bonus AUG||2.7%||2.6%|
|October 17||Core Inflation Rate YoY SEP||1.9%||2.1%|
|October 17||Inflation Rate YoY SEP||2.4%||2.7%|
|October 17||BoE FPC Minutes|
|October 18||Retail Sales ex Fuel YoY SEP||3.2%||3.6%|
|October 18||Retail Sales YoY SEP||3%||3.4%|
|October 19||Public Sector Net Borrowing SEP||£-3.26B||£-4.76B|
|October 19||BoE Gov Carney Speech|
The US dollar is currently slightly lower against all major currencies except the Japanese yen. Yesterday, the buck moved up sharply for the second session in a row. Beyond the move higher, note that trading volumes in US dollar index futures accelerated compared to the previous session and relative to 30-day averages. This is a sign that traders bought the dollar with conviction. Today's US dollar index trading range is 94.30 - 96.60.
Following a significant move higher in the last two sessions, the buck is currently taking a breather. As risk sentiment continues to deteriorate, the dollar appears to have found buyers seeking safety. Yesterday, US equity markets resumed weakening, with the S&P 500 ending the day down by more than 1%. Growth-oriented indices, such as the NASDAQ Composite, fared even worse as the US growth outlook darkens. In currency markets, the euro was particularly weak against safe haven peers such as the yen and the Swiss franc. All else held equal, the dollar tends to strengthen in relative terms when 'risk on' currencies sell off.
Turning to the latest news, yesterday's Federal Reserve speakers suggested that the pace of future rates hikes may need to be re-assessed. Federal Reserve Vice Chairman Quarles called for a more gradual pace of rate hikes, suggesting that the Fed should deliver about one hike per quarter. "Absolutely, my path for policy is more gradual" than most other policymakers, he said. St. Louis President James Bullard also noted that continued rate hikes may result in a recession. Specifically, he suggested that the Fed may have to change course if tax cut-fueled growth begins fading in the near future. Following the significant equity market sell-off this month and thanks to recent weakness in economic data (e.g. September retail sales), the Federal Reserve is less likely to continue signaling tighter monetary policy.
While the dollar has benefited from the relative outperformance of the US economy over the past few quarters, the buck is likely to continue strengthening as US growth begins slowing in rate-of-change terms. As a safe haven currency, the dollar tends to the strengthen the most in response to slowing growth. Our outlook on the dollar remains bullish.
|October 15||NY Empire State Manufacturing Index OCT||21.10||19|
|October 15||Retail Sales YoY SEP||4.7%||6.5%|
|October 15||Business Inventories MoM AUG||0.5%||0.7%|
|October 15||Monthly Budget Statement SEP||$119B||$-214B|
|October 16||Industrial Production YoY SEP||5.1%||4.9%|
|October 16||JOLTs Job Openings AUG||7.136M||7.077M|
|October 16||NAHB Housing Market Index OCT||68||67|
|October 17||Building Permits SEP||1.241M||1.249M|
|October 17||Housing Starts SEP||1.201M||1.268M|
|October 17||Fed Brainard Speech|
|October 17||FOMC Minutes|
|October 18||Initial Jobless Claims 13/OCT||210K||215K|
|October 18||Philadelphia Fed Manufacturing Index OCT||22.2||22.9|
|October 18||Fed Bullard Speech|
|October 18||Fed Quarles Speech|
|October 19||Fed Kaplan Speech|
|October 19||Existing Home Sales SEP||5.34M|
|October 19||Fed Bostic Speech|
In our previous piece on pound sterling, we wrote that the currency was likely to weaken thanks to (1) slowing growth across Europe, (2) excessively bullish speculator sentiment and (3) Brexit-related woes. Thanks to the UK’s significant trading ties with the EU, we wrote that the pound was unlikely to escape a slowdown across the region. Furthermore, speculator positioning in the pound looked ex…
In our previous analysis on the pound, we claimed that the number of catalysts driving the currency’s bullish trend were running out. At the time, we warned that the rally was running out of momentum, but did not see any evidence that would suggest adopting a bearish stance. Following recent weakness in the British pound, we downgraded our longer-term outlook on the currency to bearish on April 2…
The outlook for the pound, while still bullish, is looking less optimistic today. More specifically, factors including the ongoing slowdown in regional growth, lower expectations for a May rate hike, and significant speculator interest in the currency are hampering the rally. Following Brexit, the trade-weighted value of pound sterling (a measure of GBP relative to other currencies) hit an all-t…
In our previous commentary on the US dollar, we wrote that the buck was set to rise further thanks to our forecast for slowing US growth and inflation. Given the US dollar’s safe haven qualities, the currency performs the best when economic conditions deteriorate. Following the publication of our last commentary, the performance of the US dollar index (a measure of the currency against major pee…
In our last commentary on the US dollar, we wrote that the buck was set to move higher given underlying economic trends. Specifically, US growth and inflation was likely to keep accelerating, while the opposite was likely to happen in most major regions outside the United States. Following the publication of our last commentary, the US dollar index has strengthened from around 91.80 to around...
In our previous commentary on the US dollar, we warned that a weak dollar was hiding significant risks in growth-sensitive assets such as equities and European currencies. As the world’s reserve currency, the buck is inversely correlated to most financial assets because most cross-border lending is conducted in dollars. Thanks to a slowdown in economic growth outside the United States coupled wit…
Significance of the GBP/USD pair
GBP/USD is a major currency pair, meaning it is among the most heavily traded pairs in the foreign exchange market. The US dollar is the most traded currency in the world, while the British pound is the fourth-most traded currency. Looking at the characteristics of this pair, the pound and the dollar tend to move in opposite directions.
Given its status as the global reserve currency, the US dollar is borrowed heavily by international borrowers. As international lending accelerates when global economic growth is high, the US dollar tends to depreciate as more and more dollars chase international investment opportunities. During a downturn, foreign borrowers struggle to pay back US dollar-denominated loans, and the currency rises sharply as a result. This is typical behavior for a safe haven currency. The pound typically moves in the opposite direction, and strengthens during booms and weakens during downturns. Relative GDP growth rates for the United Kingdom and the United States are shown below:
2006 – late-2007: Pre-financial crisis boom
Leading up to the financial crisis, optimism for global economic growth was very high. In the US, early tremors in the real estate markets led investors to seek investment opportunities overseas. As a result, the US dollar began its descent in 2006 and weakened broadly against most other currencies. Relative to the troubles brewing in the US, Europe appeared to be a safe haven. As a result, the British pound (alongside the euro) began rallying in 2006. Looking at GBP/USD, the pair strengthened from around 1.75 at the start of 2016 and peaked above 2.10 in November 2007. Prior to 2007, the last time GBP/USD traded above 2.00 was in late 1992.
Late-2007 – mid-2008: Early jitters
Starting in mid-2007, investors began reducing exposure to the riskiest investments. This marked a significant change from the bullish euphoria of 2006 and early 2007. The carry trade (borrowing low-yielding currencies and investing the proceeds in high-yielding currencies) began unraveling in mid-2007. Currencies borrowed in the carry trade (such as the yen) began rallying while high-yielding currencies such as the Australian dollar began selling off.
GBP/USD only began selling off in November 2007. By September 2008, the exchange rate had declined to around 2.00.
Mid-2008 – early-2009: The global financial crisis
Starting in September 2008, panic in wholesale lending markets regarding a shortage of US dollars resulted in the sharp appreciation of the US dollar and a concurrent selloff in the British pound. While the pound had served as a safe haven from troubles in the US earlier in the year, troubles in offshore US dollar lending markets (known as the ‘Eurodollar’ market – note the term ‘euro’ denotes an offshore currency as opposed to the Eurozone’s currency) resulted in GBP/USD’s sharp sell-off.
Prior to the crisis, European banks (such as Northern Rock in the UK) funded themselves by borrowing US dollars in Eurodollar lending markets. As Eurodollars were plentiful and cheap, European financial institutions found borrowing reserves from wholesale lenders much cheaper than trying to raise retail deposits. As a result, European banks owed US dollars to their creditors, while making typically investments in a foreign currency. In other words, banks such as Northern Rock were effectively short the US dollar. While this trade worked wonders when the US dollar continuously weakened, it stopped working once the US dollar began strengthening.
Starting in September 2008 (and following the bankruptcy of Lehman Brothers in particular), Eurodollar lenders began doubting the ability of borrowers to repay loans. As borrowers feared that they would be unable to rollover their Eurodollar loans, many sold their investments (often denominated in foreign currencies) in order to buy US dollars. The US dollar rose sharply as a result. As London is the world’s leading Eurodollar lending market, perceived risk in the country’s financial industry led to a particularly acute sell-off in the pound. By the second week of 2009, GBP/USD had fallen below 1.40.
Early-2009 – mid-2010: Rebound and Eurozone crisis
Following the extreme sell-off during the financial crisis, GBP/USD rebounded by mid-2009. The pair was trading around 1.65 by the summer of 2009. The US dollar also broadly sold off during this time (after rising sharply in late 2008).
Unfortunately for the pound, the rebound was fairly short-lived. Starting in late 2009, the media began reporting that Greece had concealed the true nature of its government debt. Debt problems also began appearing in other peripheral Eurozone countries including Ireland, Portugal, Italy and Spain. As German and French banks owned substantial quantities of Eurozone government bonds, investors feared that the region’s banking system was at risk. The euro began selling off, and the pound followed suit. Given the UK’s significant trading relationship with the Eurozone, the pound tends to track the fortunes of the euro.
By May 2010, GBP/USD had declined to around 1.45.
Mid-2010 – mid-2014: Slow-motion rebound
Thanks to the rollout of several European Central Bank programs designed to bring confidence to the Eurozone’s banking system (such as the European Financial Stability Facility and the European Financial Stabilization Mechanism), the fortunes of the euro and the pound improved after the summer of 2010.
While the euro fluctuated in the following years as confidence rose and fell with each new ECB measure, the pound was more stable against the US dollar. Looking at GBP/USD between August 2010 and October 2013, the pair traded in a fairly narrow range between 1.48 and 1.68. Unlike the Eurozone, the UK did not experience negative GDP growth rates during these years. Furthermore, the country’s currency was not facing an existential threat (many believed the Eurozone would break up during this time). As such, the pound was a relative safe haven from the Eurozone’s troubles and was far more stable.
Starting in late 2013, the pound began rallying thanks to strong GDP growth both in the UK and in the broader region. The currency was also bolstered by comments from Bank of England Governor Mark Carney. Specifically, he noted that the Bank’s low interest rate policy was not permanent. As the currency rallied on expectations of tighter monetary policy, GBP/USD peaked above 1.70 in July 2014.
Mid-2014 – 2017: Euro sell-off and Brexit
The adoption of extraordinary monetary policy by the ECB (negative rates and quantitative easing) as well as a sharp sell-off in crude oil in mid-2014 led to significant dollar strength. Looking at GBP/USD, the pair had fallen to around 1.47 by April 2015.
While the pair rebounded to around 1.58 by June 2015, slowing global growth meant that the pound was broadly under pressure. The pound continued selling off for the rest of 2015. In the first half of 2016 (prior to the Brexit referendum vote), GBP/USD traded in a tight range between 1.38 and 1.50. Prior to the day of the vote, the pound rallied as most polls indicated that the “No” side would prevail.
After the pro-Brexit side won the referendum, the pound began selling off sharply. GBP/USD ended the day below 1.37. By the end of the year, the exchange rate had depreciated further to around 1.22.
2017 – early-2018: Recovery and optimism
Following the shock of the Brexit vote, many predicted that the UK would enter a recession coupled with currency devaluation-fueled inflation. This led to the pound’s sharp sell-off in 2016. Instead, the pound rallied in 2017 as growth was better than expected. While inflation rose above the Bank of England’s target rate, the BoE raised rates in order to limit its impact on the economy. This provided further support for the currency. Starting in May 2017 (following Macron’s victory in the French presidential elections), the euro began rallying as fears of a Eurozone breakup subsided. The pound soon followed, and GBP/USD ended the year above 1.35.