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WEEK AHEAD: MAY 03

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This week ahead I’m analysing GBP/USD. The start of the new month sees US non-farm payrolls data on Friday and it’s the turn of the Bank of England to set monetary policy. Thanks! Rich

Video Script

GBP/USD | Non-farm payrolls & BOE | WEEK AHEAD

 

Hi everyone, hope you’re all doing great. Looking forward to this week of trading forex and CFDs; it’s a new month so we have non-farm payrolls on Friday and there is also the Bank of England meeting. I’ll discuss the outlook for the British pound and analyse GBP/USD as well as run through the economic calendar. 

 

So, we’ve got the final set of global PMI data for April and for the most part its all looking very strong- and that’s the point really- how long can it stay this strong? Markets have already been pricing in strong growth with strong currencies like the Australian dollar, rising commodities and record high stock markets. The RBA is expected to hold rates steady at 0.1% this week and recent comments suggest Australian central bankers are in no mood to follow Canada in tapering asset purchases just yet. I’ll talk about the Bank of England and NFP in just a moment.

 

Outside of the economic calendar, some of the Q1 earnings highlights this week are PayPal, Uber, Square, Volkswagen and Pfizer.

 

On a daily price chart, it can be seen that the GBP/USD currency pair is trading higher above a 1-year-old rising trendline. Shorter term, it is sitting near the top of a 300-pip price range between 1.37 and 1.40. The break and re-test of a declining trendline suggests the next move is up in line with the long-term uptrend but another drop should first find support at 1.37.

 

To give you an idea where we stand on expected moves from the Bank of England – money markets see a 56% chance of a quarter-point interest rate rise by the end of 2022. That’s a long way off so the focus in markets for now is when the Bank of England – and every other central bank tapers its QE program. The exit of Andy Haldane, the hawkish chief economist diminishes the chance that the BOE will start tapering soon. 

 

However, analysts at NatWest think the BOE could cut the amount of bonds its buying by £4 billion at this meeting in May. That would be a much more hawkish stance than the Federal Reserve, which said last week it’s not even thinking about tapering yet- suggesting it may not even happen this year. This divergence in monetary policy explains a lot of the GBP/USD strength – as does the successful UK vaccination program, which is expected to herald a big UK growth turnaround this year. 

 

Possibly the biggest downside risk for GBP/USD and moreover the biggest upside risk for the dollar is that the Fed is underestimating the speed of the US economic recovery and resulting inflation. The biggest economic indicator is the US unemployment report, which of course is on tap this Friday. Another 900 thousand jobs are expected to have been created in April, taking the unemployment rate below 6% for the first time in a year. Big numbers like this will call into question whether the Fed will need to taper earlier than it has indicated so far – which puts upward pressure on the dollar from a rates perspective but also potentially as a haven if stock market investors think the ‘goldilocks’ scenario of strong growth and loose central bank policy is ending soon. 

 

Right thanks everyone, good luck trading this week and make sure to subscribe so you don’t miss the next episode of the week ahead.
 

 

 

 

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