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USDOLLAR Index Tempered as GBP/USD Gains on BOE Brexit Commentary

USDOLLAR Index Tempered as GBP/USD Gains on BOE Brexit Commentary

2016-05-24 11:00:00
Christopher Vecchio, CFA, Senior Strategist
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Talking Points:

- AUD/USD, EUR/USD continue to provide fodder for USDOLLAR rally.

- GBP/USD's gains come amid BOE warning over 'Brexit.'

- Higher volatility in FX markets should have implications for your trading strategies.

'To Bremain or to Brexit, that is the question.' As the British populace deals with its Shakesperian existential moment, one official has made a rather aggressive stand: Bank of England Governor Mark Carney. The British Pound is enjoying the rather standoffish tone of his remarks.

This morning, at the Parliament's Treasury Committee hearing, no words were minced when Governor Carney was forced to defend the BOE's recent actions and foray into the Brexit debate: "...we'll bring inflation back to target, whatever the outcome of the referendum...that's our contribution to a better economic outcome for the British people, and for you to suggest otherwise is to try and undermine that."

Let's rewind. Two weeks ago Governor Carney issued rather blunt commentary on what a Brexit would mean for the UK: near-term disaster with an extremely high likelihood of an immediate recession. This was not bluster; economic theory supports such a point of view. We're in agreement with Governor Carney - Brexiteers are misleading the public (and reflexively, any effort made to discredit a Brexit is supportive of a stronger British Pound).

As an island nation with limited access to natural resources, the UK is wholly dependent on the international trade regime to retain access to raw materials and finished goods around the globe. Anything done that undermines the UK's trade standing would very likely sink the British Pound and send higher the cost of imported goods - the combination of sinking growth and rising inflation, stagflation, would be very difficult for the BOE to combat amid ongoing fiscal austerity.

In any event, to echo Governor Carney's point of view, it is very much within the BOE's mandate to get involved with the Brexit debate. Despite the disillusions of most Brexiteers, a clean break from the EU will not lead to unbounded prosperity for the British people. Accordingly, given the likely economic fallout, there is truly no bigger risk to the UK economy in the near-term than the June 23 referendum vote.

Knowing this, as the steward of the UK economy, the BOE has to warn the voting population of the economic risks intrinsically embedded in a Brexit vote. In Governor Carney's words, they have "a responsibility under our remit to report not just the current trade-off that may hold in terms of returning inflation to target in a sustainable manner, but the risks, the principle risks around that trade-off." The bottom line: Brexit is a threat to this trade-off.

See the above video for technical considerations in EUR/USD, GBP/USD, EUR/GBP, GBP/JPY, AUD/USD, USD/JPY, and the USDOLLAR Index.

Read more: USDOLLAR Index Turns to Fed Speakers for Breakout Catalysts

If you haven't yet, read the Q2'16 Euro Forecast, "EUR/USD Stuck in No-Man’s Land Headed into Q2’16; Don’t Discount ’Brexit’," as well as the rest of all of DailyFX's Q2'16 quarterly forecasts.

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher's e-mail distribution list, please fill out this form

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