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USD/GBP Clings on to Minor Gains Ahead of FOMC Meeting Minutes Release

October 11, 2017 - Written by Toni Johnson

Gains against the British Pound are the exception for the US Dollar on a day of otherwise universal losses.

The USD/GBP exchange rate has managed to hold just above opening levels at around 0.7575 thanks to fresh concerns around the type of Brexit the UK will end up undertaking in 2019.

USD Wary Ahead of FOMC Minutes, but Holds above Opening Versus GBP

The approaching release of minutes from the September Federal Open Market Committee (FOMC) policy meeting is keeping the US Dollar on soft form against its major peers today, although a weaker Sterling has left USD/GBP exchange rates hanging on above opening levels.

Investors have thoroughly priced in the odds of an interest rate hike in the December policy meeting, with the futures market signalling the chance of tightening to be at 86.7% at the time of writing.

Should the FOMC minutes suggest that US policymakers are more dovish than markets expect, these odds could fall significantly – taking USD with them.

However, if the minutes signal confidence in the economy and an upbeat outlook on monetary policy then the US Dollar is likely to reverse losses overnight.

The day’s speeches from Federal Reserve officials have done little to influence the US Dollar.

Both Robert Kaplan and Charles Evans have remained largely non-committal, with Kaplan stating he is keeping an open mind on a December hike and Evans claiming that end-of-year tightening is not guaranteed.

The US Dollar is also suffering due to the fact that US and Japanese stock markets have struck record highs on retreating fears over the health of the global economy.

With investors more interested in chasing after high-yielding stocks, the safe-haven US Dollar has been unable to overly capitalise on the Pound’s weakness.

GBP Weakens as Hammond Refuses to Spend on Brexit Contingency Plan

The Pound has softened today as market focus returns to the fears that the UK may end up with the harshest possible form of Brexit.

Prime Minister Theresa May admitted earlier this week that the UK should brace for a ‘no deal’ split, given how little progress had been made in the divorce talks to date.

However, she promised that the government would begin implementing new spending and investment plans to help Britain’s economy deal with the shock of a ‘cliff edge’ Brexit.

These would include new IT systems and lorry parks outside of Dover to help ease congestion as new customs rules would suddenly apply to goods headed for the EU.

But Chancellor Philip Hammond has today refused to dig further into the Treasury’s coffers, arguing that such measures would only be of use if the UK really does end up walking away from the negotiating table and subsequently crashing out of the EU.

Hammond has stated he will not budget for additional expenditure until it is ‘responsible to do so’.

Markets are understandably unsettled by the suggestions that the UK is not only heading towards what many experts believe to be economically the worst outcome, but also that the Treasury is unwilling to do anything to minimise the fallout.

This has seen the Pound rally, which began at the beginning of this week, run out of steam and falter.

USD/GBP Forecast; Will FOMC Meeting Minutes Push US Dollar Higher?

The US Dollar is likely to remain weak in the run-up to today’s FOMC meeting minutes.

According to SEB, investors will pay close attention to whether or not the Federal Reserve believes the current weakness in inflation is temporary, noting;

‘The most interesting aspect of the minutes will likely be the discussion about temporary or structural explanations for the weak inflation and the Fed’s view of the Phillips curve’s association between a tighter labour market and rising inflation.’

Barclays Capital Research analysts concur and believe that the Fed is still likely to raise interest rates despite the weakness, stating;

‘The minutes may indicate that members preferred to reduce their estimate of the longrun neutral rate of interest as opposed to halting the normalization process.’

The Pound looks set to remain rudderless until tomorrow morning, when the Bank of England (BoE) credit conditions and bank liabilities survey results are set for release.

Should the data raise concerns over the health of the UK financial system, the Pound is likely to weaken further as this would cool expectations of a near-term interest rate hike.
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