The greenback took a hit yesterday as the Federal Reserve opened the door to a near-term interest rate cut.
Wednesday turned out to be a positive day for the GBPUSD pair. The morning session saw UK inflation meet expectation, printing at the 2% mark which is the Bank of England’s target rate. The pound perked up following this release, pushing toward the top end of the $1.25 handle and edging higher against the rest of its peers.
In the afternoon we found out the next victim of the Conservative party leadership race. This time it was Rory Stewart’s turn to bow out, leaving Hunt, Gove, Javid and Johnson. Pressure now rests on Javid, with the least amount of votes, to throw the towel in and back one of the remaining 3. No doubt this would be either Gove or Hunt which would provide a significant boost to whomever he chooses. Rumours are that Rory Stewart has struck a deal with Gove which would see much of his support filter into his campaign. Following the 6pm result, sterling reached its highs of the day, trading >$1.26 and >€1.1250 against the US dollar and euro, respectively. Today we’ll see the final round of voting which will determine which 2 will move into the last phase.
The main event came yesterday evening with the Federal Open Market Committee decision. Interest rates remained unchanged but the central bank indicated that it is closely monitoring the economic situation and is ready to act should monetary easing be required. The Fed removed the word ‘patient’ from their statement, indicating an urgency in ensuring the economy is accommodated appropriately as the situation evolves. The Fed lowered its forecasts for inflation over the coming months and also used this as justification for the rate cuts which are coming. The market is now applying a 100% probability the Fed cut next month. It’s worth remembering that the central bank have always met the market’s expectation whenever pricing probabilities have been >50%. The greenback weakened during and after last night’s decision. It’s continued to decline across Asian trade as the baton is passed over to Europe this morning.
Today’s session is all about the pound. Two big events await the currency. This morning sees the May retail sales report while lunchtime hosts a Bank of England monetary policy announcement. Fasten your seat-belts, it could be another volatile day!
Written by Viv Savani. 8:19am, June 20th 2019
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