Dollar weakens following cautious Fed

The Dollar has weakened overnight following the latest Federal Reserve interest rate-setting meeting.

Policymakers kept interest rates on hold but warned that more stimulus was needed to help boost growth. Analysts now expect a rate cut in the US to follow next month (0.25% or possibly 0.5%) and further cuts down the line. Cutting interest rates reduces the appeal of a currency because it reduces the yield investors can make from holding that currency (essentially lower rates means cheaper money from increased supply). The signal from the US Fed follows intent from other global central banks (such as the ECB and Australian central bank) to weaken their own currencies in a bid to help stimulate their economies.

Today, we will see the latest outlook from the Bank of England. UK economic data has been mixed but there seem to be increasing signs of a slowdown in certain areas which is being pinned on the Brexit uncertainty. Boris Johnson remains clear favourite in the Tory leadership battle. Further votes ahead of the weekend will determine who he will face in the Members’ ballot, with the results of this not expected until the week commencing 22nd July.

As a result, we have seen the biggest two-day move in the USD this year with the GBP/USD bouncing over 2-cents higher since Tuesday’s low (now at a 1-week high). The GBP/EUR has also recovered a bit of ground and is towards the upper end of its two-week range.

Pound struggles as Boris gets further support

Sterling has continued to push lower as fervent Brexiteer Boris Johnson continues to gather support in his bid to become the new PM.

The first poll saw him take a huge share of the Tory MP votes and since then three out of the four candidates that have dropped out of the race (Leadsom, Hancock and McVey) have pledged their support for Boris. This makes him likely to gain an even bigger portion of the votes in tonight’s second vote.

Mr Johnson was a key figurehead for Leave in the Brexit referendum of 2016 and he’s pledged to take the UK out of the EU by the 31st Oct deadline with or without a deal. The market have therefore been pricing in higher odds of a disorderly Brexit, with a recent Reuters poll indicating median expectations for a no-deal shifting from 15% last month to around 25% in June.  Generally, a no-deal exit is expected to cause disruption to the economy and markets (at least in the short-term), which makes the pound less attractive to investors and hence leads to it weakening.  

The results of the second round of voting for the new Tory leader are expected around 6pm this evening. A candidate will need at least 33 votes to continue their bids. If they all receive over 33 votes, then the candidate with the fewer votes will be eliminated. Extra rounds of votes will continue to whittle down the candidate this week until only two remain. Thereafter Tory party members will vote to decide who will be the new leader/PM.

As a result, the GBP/USD has hit the lower levels since the start of the year having moved 2-cents lower from last week’s high. The GBP/EUR touched a 5-month low after losing nearly a cent yesterday.

Clearly, the Pound has moved a long way in a short period of time and some analysts feel that a lot of the negativity surrounding a (potential) incoming hard Brexiteer PM has been largely worked into Sterling. Furthermore, we are close to some important support levels (particularly in cable) which might provide a bit of a barrier. That said, it’s still hard to see where the immediate good news for Sterling will come from.

Sterling sellers might have to keep their hopes on there being weakness in the Euro and the USD instead. The ECB are beginning to sound less optimistic about the eurozone economy and tonight we will see whether the Federal Reserve’s tone is turning more negative. More negative tones from these two major central banks could come to sterling’s aid.