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The pound rallied versus the US dollar on Monday striking a high of US$1.2986 before slowly slipping lower across the week. The pair experienced its heaviest loss on Friday, tanking over 0.6% and closing the week at US$1.2826, after four consecutive losing sessions. The pound gave up 0.6% versus the dollar across the week.
Election Speculation
Election speculation was the principal driver of the pound across the week ahead of the election on 12th December. The pound advanced on Monday as the polls showed that Boris Johnson had an impressive 18-point lead over Labour leader Jeremy Corbyn.
Investors are tying a strong lead by the Conservatives to not only a business-friendly government but more importantly a higher probability of the UK leaving the European Union by 31st December with a Brexit deal in place. An orderly exit would mean avoiding an economically damaging no deal Brexit and avoiding continued uncertainty over Brexit, which has dragged heavily on the UK economy.
Leader TV Debate
The first live, head to head debate between Boris Johnson and Jeremy Corbyn was earlier this week. The two leaders came away on roughly on par. Given that the Boris Johnson was supposed to be streaks ahead of Jeremy Corbyn, the fact that they were on a more equal footing unnerved investors, sending the pound southwards.
The downward pressure on the pound intensified when Jeremy Corbyn unveiled his party’s election manifesto. Radical plans to transform Britain with 5% public sector pay increases, higher taxes on companies and a sweeping nationalisation of infrastructure, fuelled fears among pound investors that the economy would take a hit.
Voters are being left with a choice between Labour’s Jeremy Corbyn who wants to be the most radical socialist government in history, or Boris Johnson or wants to deliver Brexit.
Macro Data
This week was a quiet week as far as macro data was concerned. There were two notable releases both of which were pound negative.
Public sector net spending
Data showed that government spending rose to its highest level in a decade in October, adding pressure to the UK’s public finances. The data came as political leaders pledge to increase public spending if they win the general election on 12th December.
Public sector net borrowing rose to £11.2 billion in October. This was well ahead of the £9.3 billion expected by analysts and £2.3 billion more than the same month last year. The increase in spending is almost certainly down to Brexit. It is unlikely to deter the new Prime Minister from spending heavily when they take office. Both the Conservatives and Labour are pledging to increase expenditure, increasing public sector borrowing to do so.
UK PMI’s
The pound experienced is heaviest decline of the week on Friday as investors digested PMI data for both the service sector and the manufacturing sector. Data showed that UK businesses experienced the deepest downturn in three and a half years this month. The HIS Markit/ CIPS UK Purchasing Managers Index for the UK showed that the decline in both the service sector and the manufacturing sector quickened in November. The readings pointed to the UK economy contracting at a pace of 0.2% in the fourth quarter of the year. The data served as a warning that the UK economy is deteriorating. Continued weakness in the economy could see the Bank of England adopting a more dovish stance and ease monetary policy. The prospect of loser policy from the central bank sent the pound to a nine-day low.
GBP – The Week Ahead
Pound investors are expected to be gripped by election speculation fever for another week, potentially with more volatility as the polling day draws nearer. Any signs that Labour are closing in on the Conservatives in the polls could weigh on the pound.
The UK economic calendar is relatively quiet with a few mid-tier announcements such as consumer confidence and house price data.
US Dollar Advances On Trade Uncertainty & Strong Data
The dollar advanced for the fourth straight session on Friday supported by a combination of trade concerns and encouraging US data.
US — China Trade Deal
Trade talk has been the dominant theme for dollar investors and the broader market across the week. Mixed messages from the US and China have prevented investors from taking on any large positions, leaving the dollar range bound versus its peers for most of the week.
The latest comments from Beijing are that China wants to do a trade deal with the US. However, they are not afraid to retaliate if necessary. China has extended an invitation for the US to go to China for face-to-face talks.
After all the to-ing and fro-ing this week, investors are no wiser as to whether the US and China are close to agreeing to a phase one trade deal. A few weeks ago, there was a sense that a deal was coming imminently. Now, realistically, investors aren’t expecting much before Christmas.
Macro Data
This week was a quiet week for US macroeconomic data, with just retail sales and pmi figures for investors to consider
Upbeat Retail Sales Boost Buck
Data showed that retail sales rebounded in October, increasing 0.3% month on month. This was well ahead of September’s -0.3% decline. The strong data sent the dollar higher. This is because strong retail sales create a strong inflationary pressure, supporting the Federal Reserve’s signal that it will probably not cut interest rates again in the near term; dollar positive.
PMI’s Beat Expectations
The dollar trended higher on Friday thanks in part to data showing that factory and service sector activity increased in November. The data calmed investor nerves over a slowdown in the US economy and boosted optimism that the US economy is proving to be resilient in the face of the ongoing US — China trade dispute and other headwinds.
The manufacturing pmi rose to 52.2 in November, up from 51.3 in October. Service sector activity increased to 51.6 up from 50.6 last month.
USD – The Week Ahead
Trade headlines will remain under the spotlight. It is difficult to predict how the dollar could react. Signs of a deal being pushed further back could boost demand for the safe haven dollar. Alternatively, a deal would benefit the US economy and make a Fed rate cut less likely — also dollar positive.
On the macro data front investors will be watching US inflation and US GDP data closely.
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