The outlook for GBP USD has grown increasingly gloomy today amid disappointing domestic data prints and rising investor uncertainty over a November rate hike from the Bank of England (BoE).
BoE Deputy Governor Cunliffe Proves Dovish – GBP Exchange Rate Encumbered
Recent domestic data from the UK has been a cause of concern for investors, with yesterday’s disappointing retail sales figures following Tuesday’s poor wage growth release and Monday’s announcement that inflation soared to 3%.
Whilst the high inflation print initially drove demand to Sterling (as it was seen to reinforce the need for a November rate hike from the BoE) demand soon diminished in the wake of some slightly coy comments from the central bank’s Governor Mark Carney, who asserted that a rate hike might be warranted in the ‘coming months’ rather than specifically in November.
Analysts posited that Carney might be trying to perform damage control in the eventuality that future data releases proved disappointing – an indication that the UK’s economy might not be fully capable of handling the November rate hike that may have been initially planned.
This possibility quickly gained momentum on the release of September’s 0.8% fall in retail sales and comments from the Bank’s Deputy Governor Sir Jon Cunliffe, who stated that it was not entirely clear that interest rates needed to rise soon.
‘We are not seeing pay pressure and for me we are not seeing sustained signs of domestic inflation pressure,’ Cunliffe stated.
Instead, Cunliffe attributed the pick-up in inflation entirely to the Brexit-related hit on Sterling, a soundbite that has left the GBP USD outlook increasingly negative.
Trump Concludes Fed Chair Interviews – USD Currency Volatility Ahead
US President Donald Trump has concluded the interview process for five candidates that he’s considering for the position of Chairman of the Federal Reserve, according to sources familiar with the process.
Reuters reports that Trump met with the current Chair Janet Yellen yesterday, though he hasn’t firmly decided who will be her replacement.
The primary contenders in the running are Fed Board Governor Jerome Powell, former Fed Governor Kevin Warsh, and Gary Cohn, Trump’s economic advisor.
Powell is largely regarded as being the spiritual successor of Yellen, with a gradualist sentiment when it comes to raising interest rates, somewhat similar to Warsh.
Less is known about Warsh, however, though he has historically criticised the Fed’s bond-buying scheme and openly advocates adjustments to the inflation target.
Cohn’s chances of getting the position are said to have decreased after he critiqued the president’s response to the Charlottesville protests.
Yellen’s time as Fed Chair ends in February (unless she continues for another term), though the announcement could be due as soon as next week (before Trump’s tour of Asia), with Trump stating that a decision could be expected ‘over the next fairly short period of time’.
This regime change is liable to rattle the markets – though a shift from Yellen to Powell would, perceivably, demonstrate the most continuity given their similar stances on monetary policy.
According to a Reuters poll of 40 economists, another term for Yellen would be the best pick, with Powell as the second best option.
If Warsh wins the position the market reaction will likely be more volatile, with his stance on reform liable to upset the markets.
Fed Yellen Due to Speak on Monetary Policy – GBP USD Liable to Slide
Yellen is due to round off this trading week by discussing monetary policy in a speech this evening, another event that could push GBP USD even further down.
The Fed has grown increasingly hawkish in recent weeks, with many expecting them to push for a third and final rate hike before the end of this year.
If Yellen repeats her previously hawkish stance then GBP USD will come under severe pressure, conversely, a step towards caution might give Sterling the space it needs to claw back some losses.
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