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Sterling bounces back strongly and the Fed cuts rates

1st August 2019 Market Update

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🇬🇧 GBP –  Sterling found some support out of nowhere yesterday after 5 days of heavy losses. With no data to rely on, it seems the Pound benefitted from month-end demand from traders taking profits which lead to a rapid fightback in the afternoon. Boris Johnson continued his tour of the UK by visiting Northern Ireland but Brexit headlines were limited which probably contributed to the rise for the Pound.

Analysts expect the Sterling rally to be brief, however, as the no-deal Brexit risks continue to rise. The Pound has been particularly sensitive to news headlines recently and the ongoing uncertainty will raise the possibility of Sterling falling for the fourth month in a row in August. A by-election in Brecon today could make the situation worse by cutting the working majority of the Government to 1 if the Conservatives lose to the Liberal Democrats.
Away from politics, Manufacturing sector PMI results are due to move further into contraction at 09:30. The Bank of England interest rate decision is expected to remain unchanged at 0.75% at 12:00 today but analysts will be looking for a dovish tone in the statement and press conference as the chance of a December rate cut has been recently priced as more likely than not. This could hurt the Pound and so it may be worth considering taking advantage of the Sterling rally while it is available.

🇪🇺 EUR – The Eurozone lost ground against Sterling and the US Dollar yesterday. GDP fell slightly compared to the previous reading and inflation undershot an already disappointing estimate. Markets were underwhelmed by Draghi’s comments on stimulating the Eurozone economy last week and they will need to hear more before confidence is regained.

Today is short on data for the single currency as only Manufacturing sector PMI results are expected to be announced. These are anticipated to remain firmly in contractionary territory and could contribute further to the Euro sell off. The Euro also remains vulnerable to US Dollar strength and the fightback for Sterling in the short term.

🇺🇸 USD –  The event that traders have been waiting for finally happened yesterday evening as the Fed announced an interest rate cut of 0.25%. After a flat morning, the US Dollar gained some ground versus the Euro but lost against Sterling as markets remained cautious. The US Dollar managed its biggest monthly gain since October and this increased immediately following the Fed’s decision to a two year high against the Euro. Powell’s commented that “it’s not the beginning of a long series of rate cuts” confirming that the move was an insurance cut to counter global growth weakness.

Today will feature Manufacturing sector PMI results but the day will be dominated by the Fed’s decision and its ongoing implications. Despite Trump commenting that Powell “let us down”, the US Dollar is likely to remain strong today as the markets digest the Fed’s more positive than expected stance.

 

Summary:

GBP: Sterling finds support to end the month
EUR: Euro suffering from poor data
USD: Markets react favourably to “mid-cycle adjustment” to interest rates


 

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Darren Kilner

Darren Kilner

Darren is Head of Dealing at FairFX. Darren lives and breaths FX, his Mastermind topics are G8 currencies and economic forecasts.

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