British Pound Finds Support on Fundamentals, But Risk Trends Still Hold Influence

GBP/USD

After seeing its two day rally thwarted by a flight to safety on the back of a record low in U.S new home sales the GBP/USD is again tracking higher. The Pound has seen support grow following the release of the new government’s emergency budget, which received a vote of approval from ratings agency Moody’s today. Nevertheless, the sharp reversal signal that risk sentiment remains a main driver of price action as it is explaining 56% of direction. Indeed, it wasn’t till stock markets rebounded that the pair started to regain its footing. A rise in U.K. interests rate expectations were also a supporting factor as BoE governor King stated that a change in monetary policy would start with a rate hike. Yield expectations currently hold a 22% correlation with the pair and its influence could grow if the central bank begins to hint at a possible rate hike.

BoE Interest Rate Expectations

The BoE released the minutes from their last policy meeting which showed the first dissension in seven months. Andrew Sentence voted for a rate hike becoming the first member in nearly two years to call for tightening based on growing concerns over the path of inflation. Indeed, consumer price growth remains above the central bank’s 3.0% threshold despite slowing to 3.4% in May from 3.7% the month prior. The slower pace supports policy makers forecasts of a return to their target level of 2.0%, but strong fundamentals continue suggest that prices could remain elevated which could force the MPC’s hand. The economic calendar is barren until the consumer credit and mortgage approval reports on June 29th. Discuss this and trading ideas join the GBP/USD forum.

FOMC Interest Rate Expectations

The FOMC voted to keep their benchmark rate at 0.25% and maintained that rates will remain “exceptionally low” for an “extended period.” The central bank would go on to comment that the economic recovery is "proceeding" as the job market continues to improve "gradually," but financial conditions are now “less supportive" of growth. Therefore, expect yield expectations to remain subdued over the near-term with Fed funds futures only pricing in a 11.3% chance of a rate hike in November which is down from 26.9% a month ago.

Risk

A dismal U.S. new home sales report got stocks off on the wrong foot building upon yesterday’s losses. The FOMC pledging to maintain a low interest rate environment gave a boost to risky assets but bullish momentum was short lived leaving markets virtually unchanged. A dismal U.S. durable goods report tomorrow could feed into the dimming outlook for global growth, sending stocks lower. There is little support ahead of 10,000 with downside risks to 9800. Discuss this and other fundamental data in the Economics Forum.

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com