The pound sterling has recovered sharply against the US dollar thanks to a 'dovish' interpretation to the much-anticipated US Federal Reserve's March policy decision.
- UK employment numbers strong, suggesting GBP should be higher
- Latest EU referendum polling data confirms Brexit fears are never far away, any GBP strength likely to be limited in scope
Against the euro the UK currency remains under pressure confirming the latest moves in global FX are largely USD related.
The GBP to USD rate has risen back above 1.42, by no means enough to recapture the ground lost this week, but it could put a floor beneath recent weakness.
The Federal Reserve Open Markets Committee (FOMC) turned out more dovish than expected as even though the statement acknowledged the macro improvements seen since January, it remained cautious with regards to its pace and again took into account global financial and macro developments for its decision-making.
“Investors punished the dollar because Janet Yellen failed to emphasize that 2 more rate hikes are expected this year and instead spent the large part of her testimony talking about the troubles in the U.S. and global economy,” says Kathy Lien at BK Asset Management.
“The press conference was even more dovish, with heightened concerns over the global macroeconomic outlook, the inflation forecast biased to the downside and emphasis on a low long-term rate with a gradual pace of normalisation,” says Ociel Hernández Zamudio at BBVA Bank.
Good Wages, Employment Data Suggest GBP Should be Higher
Ahead of the US Fed, the British pound was under pressure on all fronts - on the charts momentum indicators advocate for further losses across all time frames while the uncertainties surrounding the EU vote provide the fundamental fuel to push that negative momentum.
There was good news for sterling though as the number of unemployed seeking out of work benefits in the UK fell by 18K, double the 9K analysts had forecast.
This is good news for the UK economy and confirms it continues to deliver jobs and betrays the sense that if one digs below the Brexit story the economy could well support a stronger currency were it allowed the chance.
Further good news comes on data that shows average earnings increased by 2.1% in January, more than the 2% forecast.
A lot of pages have been printed carrying news of a UK slowdown of late, but today's employment numbers should keep the negativity at bay, if at least temporarily.
"With the Chancellor setting the backdrop to this afternoon’s Budget as one where the global “storm clouds” are gathering, today’s labour market figures offer a ray of sunshine. Indeed, the jobs recovery remains in full swing, with a 116,000 rise in employment in the three months to January on the previous three months," says Scott Bowman, UK Economist with Capital Economics.
Today's Exchange Rates
The pound to euro exchange rate is at 1.2740 on the open markets, bank transfers are seen in the 1.2380-1.2450 area. Independents are seen to offer quotes towards 1.2580.
The pound to dollar exchange rate is at 1.4132 on the interbank market, bank transfers are offered in the 1.3730-1.38 region while independent specialists are offering closer to 1.3940.
It is the EU Referendum that Matters
Traders continue to shed weight on GBP following news that the latest ORB poll puts those wanting to leave the European Union in the lead.
The poll of polls survey - which takes into account the results of all polling agencies - does however have the ‘In’ vote holding the advantage.
Nevertheless, the ORB data should come as a reminder that the race is a lot tighter than the odds currently priced into the pound exchange rate complex.
We have warned that the threat to the March recovery would be the resurgence of the EU referendum once the fatigue that set in following the February bout of panic was shaken off.
“The fact that the Brexit issue effectively remains a toss up in UK politics is worry enough for the market to keep cable under pressure for the time being. So far sterling has found support ahead of the 1.4150 level but may see further selling as the day wears on,” says Boris Schlossberg at BK Asset Management.
Sir Lynton Crosby, Britain’s top election strategist, has said the outcome of the vote will now depend on which side can bring rally their supporters to get out and cast their votes on referendum day. l
This suggests the scope for swinging the argument by businesses and politicians remains limited and we would argue that the broader issues plaguing the Eurozone such as immigration will be of utmost importance.
Events like the car bomb in Germany could actually feed into the debate more than many realise should a link between immigration and rising social unrest in the EU's most populous country be reinforced further.
Looking at the markets the pound to euro exchange rate (GBPEUR) has shed notable weight and has fallen to 1.2769.
The move takes it below the 20 day moving average in a confirmation that the downtrend is now favoured in all major timeframes; the 20 day (short), the 50 day (medium) and the 100 day (long-term).
The pound to dollar exchange rate (GBPUSD) is also down sharply, by almost a percent, and is about to test its own 20 day moving average support at 1.4167.
“Cable opened around the 1.4300 levels and looked to be trading quietly until the BoJ monetary policy meeting, once this was released strong selling in the GBPJPY cross saw the Cable dip quickly to the 1.4280 areas,” says Andy Harrison at LMAX.
The yen shot higher after the Bank of Japan left their QQE package and rates unchanged overnight, but shifted to being less dovish.
The BoJ has opted to maintain the 80 trillion yen pace of QE and will keep its -10bp rate on deposits reviewing the ratio of reserves to which the negative rate will be applied every three months.
It would appear that the Bank feels it is close to exhausting the options at its disposal to stimulate the soft economy.
This has seen USDJPY drift lower from the top of the current 114 to 111 range, while the broader USD has found strength as the markets focus shifts towards the FOMC meeting and policy announcement tomorrow.