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Currency Market Analysis

Jun 20, 2019 | Currency Market Analysis

Global Themes

GBP/USD reclaims $1.27 after Fed, ahead of BOE
- Dollar dives on dovish Fed
- GBP/USD jumps 1.3%, politics in focus
- Potential for hawkish BOE
- BOJ leaves policy unchanged
- Norges Bank hike imminent

USD

Dollar dives on dovish Fed
The US Dollar came under selling pressure last night following the Federal Reserve’s (Fed) monetary policy meeting, which confirmed several policymakers believe rate cuts are needed in the future. In a knee-jerk reaction to the dovish language and cautious outlook, GBP/USD jumped to $1.2660 and has extended its climb to pierce the $1.27 handle this morning.

The Fed left rates unchanged but updated its economic projections and despite optimism in economic growth, seven policymakers out of seventeen see two cuts needed before year-end to combat the lower inflation forecast. CME FedWatch Tool shows a 25-basis-point cut in the Fed’s next meeting in July is now fully priced in. There is some speculation that the Fed may even cut rates by 50bps in July if trade tensions continue to hurt global growth. US 10-year Treasury yields were dragged under 2% for the first time since November 2016 and US dollar index, measuring the strength of dollar against a basket of currencies, is flirting with 6-week lows.

EUR/USD is up over 0.9% since yesterday’s open but upside will likely be capped around $1.13 where it has recoiled over recent weeks.

GBP

GBP/USD jumps 1.3%, politics in focus
Sterling continues its climb from multi-week lows, buoyed by external factors and technical indicators. The downtrend ran out of steam on Tuesday and GBP/USD has rallied over 1.3% in the last 24 hours. GBP/EUR has also hiked over one cent higher into the €1.12 neighbourhood.

The third round of the Conservative leadership battle saw Rory Stewart eliminated with just 27 votes yesterday and Boris Johnson extended his lead with 143 votes, despite shying away from the no-deal rhetoric that he once strongly advocated. The fourth and fifth round take place today, with results expected at 1:00pm and 6:00pm respectively. The circa 160k Tory members will then vote on the final two candidates in a postal vote, with the winner announced in the week commencing July 22.

In addition to the progress in the leadership contest, Labour leader Jeremy Corbyn backed a second referendum on any Brexit deal yesterday. This may have given Sterling a boost too in anticipation of the UK potentially staying in the EU and thus removing economic uncertainty.

Bank of England

Potential for hawkish BOE
One of the major market events of today is the Bank of England’s (BOE) monetary policy meeting, with a rate announcement at 12:00pm and policymakers voting decisions and meeting minutes also revealed. All nine monetary policy committee members are expected to vote to leave rates unchanged at 0.75% but if one dissents, Sterling could shoot higher.

Despite economic growth stalling and the manufacturing sector showing signs of Brexit fatigue, the acceleration in wage growth and inflation at the BOE’s 2% could encourage a more hawkish sentiment. The uncertainty surrounding the Brexit outcome has prevented the bank from acting sooner, yet some policymakers have recently hinted hiking at a faster rate than financial markets are currently pricing in. Although politics and Brexit retain the limelight, today’s meeting could spark a fresh wave of GBP volatility.

Also on the radar is UK retail sales at 9:30am today, which often provides a good gauge of GDP growth. Sterling may gravitate with the data, although the BOE and political developments will likely overshadow.

Bank of Japan

BOJ leaves policy unchanged
The Bank of Japan (BOJ) has also concluded its 2-day monetary policy meeting, making no changes to interest rates, which remain at -0.1%. Surprisingly, the central bank also left its forward guidance unchanged despite external downside risks and subdued domestic inflation. The Japanese Yen is strengthening across the board.

The Japanese Yen is classed as a safe-haven currency, appreciating in times of heightened risk aversion. One reason for this is many traders borrow the cheap yen to fund purchases of higher yielding but riskier assets, which is known as a “carry trade”. In risk-off market conditions such as rising geopolitical tensions, an unwinding of these carry trades effectively means buying back yen. An increase in demand for JPY thus sees its value rapidly increase. As the global trade conflict escalates and US-Iran frictions intensify, the Japanese Yen is expected to continue appreciating.

Thanks to Sterling strength and technical indicators, GBP/JPY has climbed for three days straight after touching a fresh 5-month low on Tuesday. Upside traction has failed to gain momentum though and the ¥137.0 barrier may be tough to breach.

Norges Bank

Norges Bank hike imminent
The Norwegian Krone is on a tear across the board amid increasing expectation of a another rate hike by the Norges Bank this morning. Norway’s central bank has already hiked once this year and another will take the key policy rate to 1.25% from 1.0% at 9:00am today.

Will the Norges Bank stand alone as the only G10 central bank to raise rates amid the global economic slowdown? If so, how might GBP/NOK react? This currency pair has traded sideways for the last month after plunging from Kr11.5 in early May. Should demand for the krone increase and drag GBP/NOK below Kr10.9 today, an acceleration towards fresh year-lows may ensue.


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