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  • GBP/USD struggles to hold onto gains as the USD picks up a safe haven bid.
  • Brexit, trade wars, COVID-19 and the BoE all combined are propelling cable to the forefront of the FX market this month.

At the time of writing, GBP/USD is trading at 1.2600 and is down over 1% today having dropped from a high of 1.2754 to a low of 1.2599. 

The Fed is on hold until end-2022, market drink the cool-aid but heed Powell’s warnings

It is somewhat volatile in markets again as investors suck up the Federal Reserve Chairman Jerome Powell’s cool-aid, taking on board his words of wisdom. 

However, it should come at no surprise that of if there is going to be a global recovery, it is set to be slow and turbulent. This was essentially the message that was conveyed at the Federal Reserve. 

The Fed is on hold until end-2022 at least and will do USD120bn a month of QE split 80bn-40bn between Treasuries and MBS. However, for some reason, the stock markets were not satisfied with that and they fell during and after Powell’s presser.

Investors were looking for a hint of negative rates or yield curve control. Bond yields edged lower in kind and so did USD, initially. 

However, considering all the other central banks are likely to be on the same route, the US dollar has bounced back.

Investors took into account, more seriously, Powell’s bearish reflection on the current situation and pessimistic outlook where he described a bleak future for the US economic landscape where many millions of jobs may never come back.

Until there is more forward guidance in relation to negative rates and yield curve control, however, despite how bleak the future may be for US jobs, the US economy is regarded better equipped to weather the storms of prolonged recessions.

The US’s perceived resilience makes it an attractive bet for global investors compared to elsewhere. 

When investors factor in the USD’s role in the global economy, there is no getting away from the fact that for all of its flaws, it is still the cleanest shirt in the laundry basket, especially at times of great uncertainty. 

Speaking of which, the US elections and trade wars will be the next in line to hamstring investor’s attention with respect to the greenback.

However, for the time being, cable will now be driven by Brexit and the UK’s plight to get the economy back on track in a post-COVID-19 epidemic world. 

Brexit negotiations to intensify

In the latest headlines, No 10 says Brexit negotiations will now intensify, with weekly talks throughout July and into early August in the hope of a breakthrough.

This negotiation come at a very difficult time for the UK which is still suffering from relatively elevated COVID-19 cases and there are fears of the R-rate rising back above 1.

Retailers are set to return to business next week although hospitality and school re-openings are being delayed. 

The bulls can only hope that the easing of the UK’s lockdown goes uninterrupted by fresh waves of the virus as EU-UK Brexit tensions start to rise into the proposed UK PM/EC President meeting.

The EC Summit is between the 18the and 19 June. The UK’s PM Boris Johnson and the EC President von derLeyen are set to discuss matters further some time after the Summit amid hopes of a breakthrough. 

BoE June 18th

If there was not enough to contend with, traders will also be looking to the Bank of England’s meeting around the corner.

The Bank of England’s Monetary Policy Committee is expected to keep Bank rate unchanged at 0.10%  next week,  although the Asset Purchase Facility could well be increased by GBP 200bn over the course of the summer, analysts at Rabobank call.

The MPC could go ‘all in’, but we believe it will opt for a more flexible approach by adding GBP 100bn next week, and then another GBP 100bn in August,

the analysts at Rabobank argued.

The analysts were also noting that there has been plenty of market chatter and official talk about negative interest rates. “This option is ‘under review’, but we don’t think that the MPC is ready to explore this avenue.”

GBP/USD levels

 

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