GBP/USD dropped to a low of $1.295 before bouncing back to $1.299 ahead of the release of the UK’s public finance data.
With UK public sector net borrowing being higher than expected in June, the pound may fail to climb back above $1.300 before the weekend.
UK public sector net borrowing came in at 6.3b in June, down from an upwardly revised 6.4b in May but significantly higher than the 4.2b figure forecast by economists.
Despite this, after the report was published the pound clung to modest gains against the euro and US dollar and remained higher against the Australian dollar after rebounding from a 3 ½ year low.
While GBP/USD has not performed well over the last five days, slumping from highs of $1.311, the pairing could jump next week.
Yesterday was dismal for the pound in spite of the UK publishing seemingly robust domestic retail sales figures.
While the rate of consumer spending rebounded in June, poor figures in May and April mean that retail sales for the second quarter as a whole were unimpressive and only just balanced out the slump recorded in the first quarter.
Sterling was also pressured lower by the latest Brexit developments, with hints that the UK could take a hard-line stance in negotiations leading to concerns that the nation could leave the EU without a trade deal in place.
UK International Trade Secretary Liam Fox was quoted as saying; “We don’t want to have no deal. We can of course survive with no deal, we have to go into a negotiation with those on the other side of the table knowing what we think.”
GBP/USD losses were a little limited however as the US dollar was restrained by a surging euro.
The common currency registered significant gains against all the major currencies after European Central Bank (ECB) President Mario Draghi indicated that the central bank will begin discussing policy tightening in the autumn.
There’s no US data to look out for today, but with the Federal Reserve interest rate decision looming, speculation about what tone the central bank is likely to adopt may inspire US dollar movement in the days ahead.
Lloyds Bank said in a statement: “With no policy change expected in July, the focus for markets will be on whether the Fed sends any new signals about its intentions for the rest of the year.
“In recent weeks, the divergence between market expectations for interest rates and the comments of the majority of Fed policymakers has widened.
“Markets now put less than a 50 per cent probability on an interest rate hike this year.
“In contrast, last month’s latest forecast updates from FOMC participants still pointed to the likelihood of one further interest rate rise this year, followed by another three in 2018.”
If the Fed takes a cautious approach and dampens hopes for borrowing costs being revised again in 2017 the US dollar could tumble, sending GBP/USD soaring in the process.