- Pound Sterling (GBP) Exchange Rate Struggles on ‘Brexit’ Uncertainty – Implied volatility reaches record-high
- US Dollar (USD) Rate Advances on Positive Domestic Data – Advance retail sales improve upon market forecast
- FOMC 2-Day Meeting Begins – Market implied odds of a rate hike at 0%.
- GBP/USD Exchange Rate Forecast to Hold Losses – ‘Brexit’ uncertainty to weigh on risk-appetite
The combination of Euro weakness and damp market sentiment caused the US Dollar to advance versus most of its major peers today, with the GBP/USD exchange rate falling by around -0.3%.
Pound Sterling (GBP) Exchange Rates Pressured by ‘Brexit’ Fears
Such is the uncertainty regarding the UK’s EU referendum vote, and such is the divergence of opinion poll results, that market implied Sterling volatility has reached a record-high with expectations of greater price-swings to come.
One of the major factors weighing on demand for the Pound today was endorsement for the ‘Leave’ campaign from one of the UK’s biggest newspapers, The Sun.
‘Outside the EU we can become richer, safer and free at long last to forge our own destiny — as America, Canada, Australia, New Zealand and many other great democracies already do,’ The Sun said. ‘If we stay, Britain will be engulfed in a few short years by this relentlessly expanding German-dominated federal state.’
Also adding to Sterling headwinds was stagnant inflation on the year in May which failed to meet with the median market forecast 1.3%, holding at 1.2%.
Although the inflation numbers are somewhat disappointing, Pantheon Macroeconomics’ chief UK economist Samuel Tombs argues that May’s numbers shouldn’t be overly discouraging, as the headline figure masks robust inflation in the UK’s dominant services sector:
‘May’s unchanged inflation rate masks building price pressures in the domestic services sector. CPI services inflation rose to 2.6% in May, from 2.4% in April. This pick-up occurred despite a plunge in airline fares inflation to -9.0% from -3.2%. Our measure of underlying services inflation—which excludes airline fares, as well as education and rent prices which are heavily influenced by government policies—rose to 2.8% in May, its highest level since March 2013, from 2.4% in April. The tightening of the labour market and the increase in the National Living Wage both clearly are boosting cost pressures for firms.’
The Pound Sterling to US Dollar (GBP/USD) exchange rate is currently tending in the region of 1.4173.
US Dollar (USD) Exchange Rate Pushes Higher but Reduced FOMC Bets Limit Gains
Although the US Dollar edged higher versus all of its major peers, the ‘Greenback’ (USD) cooled from intraday highs as implied market odds of a rate hike from the Federal Open Market Committee (FOMC) fell to 0%.
Fed policymakers are not expected to consider altering monetary policy until after the conclusion of the UK’s EU referendum. Domestic political uncertainty and the need to establish whether the most recent Non-Farm Payrolls disappointment was a blip should also prevent the FOMC from tightening outlook.
Domestic data produced positive results. May’s Advance Retail Sales were forecast to rise by 0.3%, but the result actually climbed by 0.5%.
‘It was nice to see a good retail sales number, but folded on top of that you have Brexit, speculation around the Fed and the market still near some highs,’ said Richard Sichel, of Philadelphia Trust Co. ‘That’s causing investors to remain cautious. The news cycle has been taken over by what the Fed is going to do.’
The Pound Sterling to US Dollar (GBP/USD) exchange rate dropped to a low of 1.4106 during Tuesday’s European session.
GBP/USD Exchange Rate Forecast to Hold Losses on Damp Market Sentiment
Whilst the outcome from the FOMC interest rate decision is unlikely to be hugely impactful given the likelihood of unchanged outlook, the accompanying press conference could reveal clues regarding future policy action.
‘Brexit’ uncertainty and damp risk appetite amid market volatility should also limit the appeal of the UK Pound and boost appetite for safe-haven assets.
The UK’s Average Weekly Earnings data could be of interest as a rise would support hopes that inflation will pick up in the medium-term, but EU referendum developments may overshadow domestic data results.
The Pound Sterling to US Dollar (GBP/USD) exchange rate reached a high of 1.4218 during Tuesday’s European session.
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