Ahead of the latest Bank of England (BoE) Financial Stability report the mood towards the Pound soured, remaining under pressure despite an easing in the atmosphere of political uncertainty.
A sharp slump in domestic consumer confidence, as reported by YouGov, also weighed on the appeal of Sterling, with signs pointing towards a greater loss of momentum within the wider economy.
Fresh jitters are likely for GBP exchange rates once BoE Governor Mark Carney speaks, as analysts at TDS noted:
‘While it’s unlikely we’ll hear much on the monetary policy front, Governor Carney may take the chance to push back against the two hawkish MPC speeches last week.’
If Carney does express greater caution over the outlook of the UK economy then the chances of a return to a monetary tightening bias could weaken once again.
On the other hand, any fresh signs that the BoE is shifting towards a more optimistic view could give the Pound US Dollar exchange rate a rallying point.
May’s net consumer credit and mortgage approvals figures may put increased downside pressure on the Pound, however, with both likely to indicate a continue weakening in domestic confidence.
Should lending increase on the month, though, this could bolster the appeal of the Pound, indicating that consumers are still largely shrugging off the uncertainties surrounding Brexit and the hung parliament.
Lower Odds of Fed Rate Hike Could Boost GBP USD
The GBP USD exchange rate could benefit from ongoing speculation over the likelihood of the Federal Reserve raising interest rates again before the end of the year.
Commentary from Fed policymakers has proved mixed, denting the appeal of the US Dollar as domestic data also proved largely discouraging.
As a result the ‘Greenback’ is vulnerable to any downside disappointment from June’s US consumer confidence index or May’s personal consumption expenditure report.
A weak showing from the PCE could substantially lower the chances of the Fed pursuing a more aggressive course of monetary tightening, given that the measure is the central bank’s preferred measure of inflationary pressure.
If the odds of another Fed rate hike seem to diminish the Pound could make fresh gains against the US Dollar, particularly if market risk appetite picks up.
Analysts at Rabobank do not expect the central bank to maintain a faster pace of monetary tightening, noting that:
‘From the start we have expressed our doubts about the Trump rally and in particular the anticipated progress on fiscal policy that supported it and events in Washington are increasingly confirming our long held view. Moreover, if we are right about the Fed getting ahead of itself – not having been able to resist the animal spirits – the correction could be even more painful.’
Should policymakers prove more reticent on the subject of policy normalisation then the GBP USD exchange rate could benefit.
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