Update: Those strong expectations of a rate hike tomorrow are seeming a little premature after the release of today’s US inflation data. Consumer prices actually declined on the month in May, falling -0.1% instead of slowing from 0.2% to 0.1%. Advance retail sales also posted a surprise decline, falling -0.3% last month. Combined with the recent poor non-farm payrolls data, this has prompted traders to reconsider just how confident they actually are about a hike tomorrow. The weakened Pound has been able to climb 0.3% against the US Dollar thanks to this development.
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The Pound US Dollar exchange rate is within a couple of pips away from returning to its Thursday night low of 1.2655 today as fears mount that the UK’s credit rating could be cut.
Moody’s had downgraded the UK from its prized AAA rating to Aa1 following the vote for Brexit and has now warned that the election result is ‘a credit negative’.
According to the credit ratings agency, the result has not only made it harder for Theresa May’s new minority government to continue with its austerity programme – therefore pushing public debt higher – but has also threatened to further complicate the already convoluted Brexit negotiations.
The huge rise in support for Jeremy Corbyn could be interpreted as a vote against austerity, Moody’s claims, creating additional fiscal risks on top of the threat of a slowing economy.
Consolidation of debt will therefore have to be a lower priority, meaning ‘the public debt ratio will rise further and for longer than we had expected, placing the UK among the few highly rated European sovereigns whose public debt is still rising’.
S&P have also offered a bearish outlook on the UK’s future, with European Chief Economist Jean-Michel Six stating;
‘For the time being, the outlook remains negative.’
‘In terms of the outlook for growth, it’s clear that things are not going in the right direction.’
Bearish Outlook for UK Economy could Protect USD GBP from Dovish FOMC Rate Hike
Pound US Dollar losses today are being slowed marginally by market caution ahead of this week’s monetary policy meeting from the US Federal Open Market Committee (FOMC).
While there are odds of 95.8% that the FOMC will vote to hike interest rates to 1.25% this week, poor non-farm payrolls figures released recently have thrown expectations of another 1-2 hikes this year into doubt.
The latest labour report showed that the pace of new job creation had slowed from 174,000 to 138,000, against forecasts of an uptick to 185,000.
April’s figures were also revised to show only 79,000 jobs had been created during that month, which may suggest the labour market is having trouble removing the remaining slack.
Markets are now contending with the possibility that this week’s tightening could be a dovish hike, with the post-meeting statement keeping the door to further normalisation firmly shut.
While this might help to slow GBP USD losses to some extent, the outlook for the pairing remains firmly to the downside.
Credit Agricole CIB Research expects, given the Pound’s historical performance, that GBP USD could be set to lose another -2.5 cents;
‘A look at May 2010, the last time we had a hung parliament, would suggest that the drop in the currency may have further to go. The approaching Brexit negotiations will only complicate the GBP-outlook.’
‘While coalition talks seem to be already underway, downside risks for GBP could persist in the near-term as uncertainty about the future government and, by implication, the UK’s Brexit strategy lingers…The fact that investors have unwound their shorts does not help GBP.’
‘We expect GBP/USD to revisit its lows around 1.25 … Subsequently, we will be reviewing our near-term forecasts.’
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