GBP - British Pound
After the pound’s decline to two-year lows earlier this week, expect the knock on effect to follow shortly after. In general, a drop in a currency’s strength is expected to boost exports due to prices becoming more attractive to foreign importers. It is expected, in the case of the UK, that the opposite will occur and we will see an increase in inflation by lifting importing costs.
After the 2016 referendum, a weaker sterling combined with unchanged trade arrangements with the EU should’ve caused a surge in foreign demand for UK goods, however the evidence suggests this wasn’t the case. Export figures remained fairly consistent and we saw an increase in living costs as a weaker currency increases the cost of imports. As a net-importing nation, the financial burden lies with both UK consumers and corporates. In 2018, the UK imported roughly £230 billion of goods from the Eurozone and since the start of 2018, GBP/EUR has seen a 4.5% decline, leading to a surge in costs on UK imports from Europe. Many of PM Johnson’s precautionary steps in case of a ‘No Deal’ Brexit, will involve negotiating trade deals elsewhere in the attempt to offset the increased cost in imports to the UK.
Focus now turn’s to the US Fed’s rate decision later today and the BoE Inflation Report on Thursday.
Today is the July 2019 FOMC Meeting Preview, where the Fed are expected to cut the US interest rate by 0.25% (25bps). The cut is expected to stimulate economic growth by reducing consumer saving and is seen as a preventative measure against the slowdown in global growth. The decision comes at a crucial time as trade issues with China remained unresolved and Trump continues threatening tariff implementation on European exports.
Assuming the 25bps cut takes place, focus turns to the FOMC statement and Chairman Powell’s following press conference. The US Dollar may still reposition itself in the market as investors will look to buy/sell off USD as the Fed’s outlook and tone is determined. During the statement, the second paragraph is expected to carry a dovish tone, where the Fed expresses its’ cautiousness and willing to react (cut rates) later in the year in order to continue their planned economic expansion. During Powell’s press conference, he is expected to repeat the language used in his July Congressional testimony, in which he stated that the FOMC’s economic outlook remains positive, however risks are elevated. He is also expected to point to disappointing inflation and the risk of expectations becoming de-anchored to the downside. Chances are, this cut will set the foundations for further cuts in either September or October.
What if there is a 50bps cut? Expect a volatile and sudden drop in the USD and look to take of advantage of sudden spikes until it finds its true market position. Not only is a 50bps cut unexpected and at this stage, unnecessary, but it leaves Powell’s and the Fed’s credibility in tatters and would mark a clear breakdown in communications.