The Pound US Dollar exchange rate will likely encounter a great deal of turbulence towards the end of the week as markets react to the build-up and aftermath of the imminent Fed decision and UK Prime Minister Theresa May’s Brexit speech.
USD Weak in Build-up to Tonight’s Fed Policy Announcement
Traders opted for caution today in the build-up to tonight’s Federal Reserve rate policy decision, further knocking demand for the US Dollar.
Whilst markets do not predict that a rate hike will take place at this event, they do anticipate that Fed Chair Janet Yellen will announce the tapering of the bank’s bloated $4.2 trillion balance sheet; an event that would signal a move towards hawkish policy.
Beyond this, investors are currently speculating on the possibility that the Fed will push for a rate hike at the December meeting, an event that has been deemed increasingly likely in the wake of last week’s accelerating US inflation figures, (the headline printed at 1.9%, up from previous period’s 1.8%).
In this respect, it would not take much to provoke a USD rally, with any hawkish indication in the accompanying statement regarding a December rate hike (or even just the tapering of the aforementioned balance sheet) liable to propel the US Dollar against the Pound.
Volatility for GBP USD Forecast on Friday’s Brexit Speech
Theresa May is due to give a speech on Friday regarding the future of the United Kingdom outside of the EU; an event that has already caused a great deal of controversy within the political sphere.
The market reaction was initially somewhat bearish, with many calling UK Foreign Secretary Boris Johnson’s recent essay on the subject of Brexit a ‘challenge’ to Theresa May’s leadership and using it to point to a divide within the Conservative party.
Whilst this news did briefly cause the Pound to stumble, it regained its composure in light of recent reports that May and Johnson had possibly reconciled and formed a truce.
The result of said truce is allegedly a proposed £20B payment to the EU, to be paid in instalments until the end of a transition period.
Investors have been somewhat pleased with this possibility, as such a proposition could help to ease the current negotiation deadlock, (especially with one of the primary sticking points being the EU’s divorce bill), thus pushing the UK further away from a ‘cliff-edge’ style Brexit.
However, this possibility remains conjecture; May might simply avoid the subject of a solid figure, instead focusing on trying to reassure businesses in both the UK and the EU that some form of relationship will remain. Whilst this could perceivably propel Sterling, it will not ease the deadlock, so GBP USD may only be able to steady itself rather than advance.
In the mean-time, markets will assess US employment figures and UK loan figures (both due tomorrow), as well as Friday’s set of US Markit PMI surveys – though these will not take centre stage, especially with markets primarily concerned with the Fed rate decision and May’s Brexit speech.