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GBP/USD drops and pops to test 1.28 the figure on dovish Fed

  • The Federal Reserve keeps rates unchanged, dot plot suggests no rate hikes until after 2022.
  • GBP/USD drops and pops as markets digest the statement and decision.
  • Markets now wait for the press conference for more insight as to the Chairman’s outlook. 

At the time of writing, GBP/USD has made a round trip on the release of the Federal Reserve’s interest rate decision and has rallied to a high of 1.2802.

The Fed has left rates on hold, which was as expected. Markets were looking for more concrete guidance on the pace of Treasury buying. 

Ahead of the meeting, the prior statement, in this regard, was as follows:

To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.

Today’s statement is as follows:

To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.

This is a dovish statement that should weigh on the USD for time to come but support the stock market. 

The DXY is down 0.5% and has lost the 96 handle on the statement. 

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GBP positioning and outlook remains bearish

As for positioning, from the latest census gathered last Friday for the prior week, net short GBP positions had moved back almost to their November 2019 high.

Brexit fears resumed this month and as criticism grows as to the UK government’s handling of the coronavirus crisis, so to will the pessimism of GBP.

Additionally, recent comments from BoE Governor Bailey and other MPC members have not helped the outlook for sterling. 

The members stated that negative rates have not been ruled out. However, we that sentiment can linger for a while before we are likely to see any subsequent action from the BoE. 

 No major Brexit breakthrough expected before 1 July

Meanwhile, as for Brexit, No major breakthrough expected before 1 July. Analysts at Danske Bank offered the following summary:

  • As expected, the fourth and final negotiation round concluded on Friday without any major breakthrough.
  • The next key event to watch out for is the high level summit between PM Boris Johnson, European Commission President Ursula von der Leyen and European Council President Charles Michel at or around 19 June.
  • We do not expect the UK to ask for an extension of the transition period (deadline 1 July) and do not expect any sub – deals on fishery and financial services either.
  • Our base case remains the two sides can reach a simple free trade agreement on goods trading before 31 December 2020 (65% probability) but the risk of a no deal Brexit has risen to 35% (20% previously).
  • We expect EUR/GBP to move higher near term, as investors start to reprice the risk premium. Risk to this outlook is global risk sentiment, which continues to improve. 

GBPUSD levels

More to come…

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