GBP/USD Ekes Out Mild Gains Ahead of Financial Stability Report and Yellen Speech

June 27, 2017 - Written by John Cameron

STORY LINK GBP/USD Ekes Out Mild Gains Ahead of Financial Stability Report and Yellen Speech

Investors interested in the Pound or the US Dollar today are holding their breath ahead of two key developments.

This has left the GBP/USD exchange rate able to advance 0.3% to 1.2750 ahead of the Bank of England’s (BoE) Financial Stability Report and a speech from Federal Reserve Chairwoman Janet Yellen.

These both have the potential to change the outlook on the financial system and therefore the pricing of the British Pound and the US Dollar, so Markets are firmly in wait-and-see mode ahead of the developments.

Will BoE Financial Stability Report Cause Volatility for GBP?

The latest Financial Stability Report could see the Financial Policy Committee (FPC) reigning in some of the looser measures implemented in the wake of the vote for Brexit.

Rising consumer borrowing and levels of risky lending are becoming a concern, so it is likely to FPC will raise the countercyclical capital buffer, forcing banks to hold more capital in reserve and thereby curbing lending.

These measures could be interpreted as a vote of confidence in the strength of the financial system now that the volatility following the Brexit referendum has subsided, although it could also suggest that the FPC is worried about household indebtedness.

There are already whispers that the next financial crisis is on the way, so signs of caution from the Bank of England could unsettle the markets.

According to a client note from ING Currency Strategist Petr Krpata; ‘Our economists expect the emergency measures (designed to boost the access to credit in the wake of the surprise Brexit vote last year) to be at least partially reversed.’

‘However, these macro prudential measures are unlikely to have an imminent impact, yet should be viewed as a healthy course of action given the surging consumer credit over the last twelve months. Expect largely limited impact on sterling.’

Will USD Get a Boost From Janet Yellen’s Speech?

Chair of the Federal Reserve Janet Yellen is due to speak in London at the close of the European session today.

Naturally, traders are pausing ahead of her comments in order to see how the balance of risks for the GBP/USD exchange rate changes - if at all.

The topic of Yellen’s address is ‘Global Economic Issues’, so there is a chance she won’t touch on US monetary policy, or at least that she won’t give any clues as to whether the Federal Reserve will increase borrowing costs again before the year is through.

Pricing on the futures market shows that investors are perfectly split down the middle with regards to the potential for another interest rate hike; while 50% expect borrowing costs to still be 1.25% in December, 43.6% expect rates to have risen to 1.5%, 6.2% expect them to be 1.75% and 0.2% believe the upper bound will have touched 2.00%.

A positive assessment of the US economy from Yellen could therefore tip the scales in favour of another rate hike this year and see the US Dollar surging higher.

GBP/USD to Hold Gains Until Yellen Speech?

With ING forecasting that the Financial Stability Report will have little impact upon the British Pound, it seems likely the GBP/USD could retain the morning’s gains even after the report is released.

Bank of England (BoE) Governor Mark Carney is due to speak at a press conference shortly after the report is published, so should he provide any outlook on the financial system or monetary policy, there is the potential for Sterling to show significant deviation from its current trajectory.

However, United Overseas Bank believes that, overall, GBP/USD is stuck in a rut;

‘GBP moved into neutral phase late last week when 1.2720 was taken out. The current movement is viewed as part of a neutral consolidation phase and we expect this pair to trade sideways within a broad 1.2640/1.2820 range for now.’

US consumer confidence data for June is due to be released mid-afternoon and is expected to show a mild weakening in sentiment, although optimism will still prevail.

Markets are likely to ignore this to focus on Yellen’s upcoming speech, which has much more bearing on the US Dollar’s long-term trajectory than monthly confidence stats.

Unless Yellen gives a hawkish outlook on US monetary policy, indicating that there is more monetary tightening on the horizon, the GBP/USD exchange rate may remain range-bound in the short-term.

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TAGS: Pound Dollar Forecasts