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Pound under renewed pressure as Brexit confusion reigns

By Alex Edwards

A lot of the action in currency markets came yesterday evening as the US FOMC made their monetary policy announcement. The statement was more dovish than the market was expecting; the Fed cut its GDP forecast to 2.1% vs. 2.3% in December as well as making other downward revisions in 2020 and 2021. They also indicated they would not hike interest rates through the rest of the year and may only look to raise rates once in 2020. It was also clear that inflation was under control, partly a result of downward pressure on oil prices. This all contributed to a dollar sell-off and GBP/USD spiked on the news, gapping through the 1.32 figure.

However, it didn’t hold on for too long as Theresa May blamed the delay to Brexit on MPs. Earlier on in the day, the PM wrote to the EU requesting a delay to Brexit until 30 June, permission of which is likely to be granted, but a short extension isn’t music to the ears of investors or traders and the pound has come under selling pressure itself.

In other news yesterday, headline UK inflation data printed slightly stronger than expected at 1.9% y/y vs. 1.8%, but it was shrugged off by a market more interested in Brexit developments and the FOMC decision that evening. The Bank of England rate announcement is due today, but with interest rates firmly expected to remain on hold, like the inflation headline yesterday, it’s likely to be have little effect on the pound.

The FOMC made their monetary policy announcement last night. The statement was more dovish than the market was expecting; the Fed cut its GDP forecast to 2.1% vs. 2.3% in December as well as making other downward revisions in 2020 and 2021. They also indicated they would not hike interest rates through the rest of the year and may only look to raise rates once in 2020. It was also clear that inflation was under control, partly a result of downward pressure on oil prices.

This all contributed to a dollar sell-off and GBP/USD and EUR/USD spiked on the news, EUR/USD in particular, gapping through the 1.14 figure, and on to a high of 1.1448.

EUR/USD couldn’t quite make the break through 1.1450 on the back of the FOMC announcement. It’s fallen back this morning and opens in London at 1.1405. It’s difficult to pin-point exactly what has been a sudden sell-off this morning – it may just be some heavy corporate supply. More likely is’ a result of the publication of the ECB’s monthly economic bulletin which states that recent data points to a sizable moderation in growth momentum, but this isn’t anything investors haven’t heard before. Perhaps it’s more of a reality check for traders.

The Australian dollar jumped through trade on Wednesday, extending moves beyond 0.71 to touch intraday highs at 0.7165 and close the session as one of the day’s best performers. Having offered little throughout the domestic session the AUD was buoyed by a dovish FOMC policy statement. The Fed fell in line with market expectations, announcing it does not intend to raise interest rates again this year. The AUD immediately jumped 50 points before profit taking took the sting out of the rapid extension.

Australian employment data then printed better than market forecasts overnight, sending the AUD higher again – it opens in London at .7140.

The Canadian dollar rose against the United States dollar yesterday. This was mostly due to the dovish FOMC statement, resulting in a weaker USD. The Federal Reserve maintained its line about being patient with future policy adjustments and stated they do not intend to raise rates this year.

NZD/USD jumped through .69 yesterday evening on the back of the FOMC yesterday evening, then fell back on profit taking, but then rallied again following the release of better than expected NZ GDP overnight; it printed bang in line with expectations at 0.6% q/q but makes the possibility of an RBNZ rate cut a less of a possibility, at least in the near term. NZD/USD opens this morning at .6915.