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Currency Market Analysis

Jun 19, 2019 | Currency Market Analysis

Global Themes

Will GBP/USD fall below $1.25 today?
- Fed rate decision looms
- Boris builds support, inflation eyed
- Dovish Draghi sends Euro south


Fed rate decision looms
The prime focus of today is the Federal Reserve’s (Fed) monetary policy announcement at 7:00pm this evening. No changes to policy are expected today, but the market is fully pricing in two rate cuts before year-end and a 50% chance of a third (source: CME Group data) Consequently, a dovish surprise from the Fed is unlikely as is any downside risk for the US Dollar.

Given the pricing in of the rate cuts, there is little room for the Fed to sound overly dovish and beating market expectations. Therefore, should the Fed disappoint the doves with more of a neutral tone, the dollar could actually strengthen this evening. Many central banks are taking the same stance on monetary policy amid dwindling global growth, cooling inflationary pressures and the ongoing trade disputes. Therefore, even an exceedingly dovish Fed might fail to weaken the dollar considerably as other central banks are expected to follow suit anyway.

EUR/USD lingers beneath $1.12, down 1.45% from the month high of $1.1347 just eight days ago. Should the dollar strengthen, the currency pair could fall closer towards $1.11 once again. GBP/USD may be dragged below $1.25, a move only witnessed three times since April 2017.


Boris builds support, inflation eyed
The pound remains trapped in a downtrend against multiple currencies as a result of the ongoing Conservative leadership contest. The field in the race has been reduced to five candidates as the second round of voting saw Dominic Raab eliminated. Boris Johnson retained a solid lead with the support of well over a third of Tory MPs and 80 votes clear of second place Jeremy Hunt on 46.

MPs will follow in the same format today in a third round of voting and results announced around 6:00pm. The process will be repeated on Thursday, but late morning, to try and whittle down the candidates to two. As Mr Johnson increases his lead, Sterling may continue weakening as the prospect of a no-deal Brexit also increases. The perceived wisdom is that a no-deal Brexit could wipe another 10% off the value of the pound. Already GBP/USD and GBP/EUR have depreciated nearly 5% since early May. GBP/JPY was on track to record its lowest daily close since 2016 but managed to scrape back above ¥136.0 before close of play. Perhaps the selling pressure on the pound is beginning to run out of steam in the short-term?

UK inflation is also in the spotlight at 9:30am today. The UK consumer price index is forecast to cool to 2.0% in May from 2.1% in April y/y and 0.3% from 0.6% m/m. This reduces the pressure on the Bank of England to raise interest rates, therefore Sterling may react negatively to a weak inflation figure today.


Dovish Draghi sends Euro south
European Central Bank (ECB) President Mario Draghi warned that further monetary stimulus might be needed, possibly through cutting interest rates or asset purchases, if inflation in the bloc doesn’t pick up. The Euro tumbled across the board yesterday with GBP/EUR spiking back above €1.12 after hitting a fresh 22-week low earlier in the day.

The dovish comments by Mr Draghi sparked a wave of selling pressure on the Euro and Germany’s 10-year government bond yield plunged to a new record low sending other Eurozone bond yields lower also. Exacerbating the negative Eurozone outlook was the final inflation figure confirming inflation rose 1.2% in May, down from 1.7% a year earlier. A German ZEW survey also revealed economic sentiment in Europe’s powerhouse slumped to its lowest level since December 2018.

EUR/USD quickly fell half-a-cent to 2-week lows on the comments and GBP/EUR recorded its biggest daily gain since early May. Meanwhile, US President Donald Trump hit out at Mr Draghi following his speech, accusing Europe of currency manipulation and making it unfair for the US to compete.

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