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GBP & USD Emerge after Weekend of Tumult on the Newswires

GBP & USD Emerge after Weekend of Tumult on the Newswires

2016-10-31 11:30:00
Christopher Vecchio, CFA, Senior Strategist
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Talking Points:

- Rumors swirl about Mark Carney's tenure at the BOE: will it end this Thursday?; or will he serve as long as another five years?

- Fed rate hike odds for December steady around 70%.

- See the DailyFX Economic Calendar for Friday, October 28.

You might be surprised by the lack of damage to the British Pound and the US Dollar after a weekend of intense political developments on both sides of the pond relating to Brexit and the US Presidential elections. After all, with the Bank of England meeting this Thursday and the US Presidential elections next Tuesday, the stakes are running high for both the British Pound and the US Dollar.

Starting with the British Pound, all attention has been paid to the rumors swirling about Governor Mark Carney's tenure at the Bank of England: will he finish out his term through 2018?; or could he retire immediately? A few thoughts. The BOE is better off with Mark Carney at its helm than nearly any possible replacement at present time. A Carney-led BOE would maintain its independence, while his replacement, given then context in which it would occur - Carney being harangued by UK Prime Minister Theresa May - would likely be no more than a 'yes man' put into place to exercise the government's will. Such developments would result in a credibility crisis at the BOE; and ultimately, send the British Pound into full-fledged panic mode.

With respect to the US Dollar, you don't need to look further for Friday's sharp, late-afternoon selloff than the bombshell development of the FBI reopening its investigation into Democractic candidate Hillary Clinton. As we've explained previously, the way US equity futures have behaved relative to betting markets would suggest that markets "prefer" a Clinton victory to a Trump victory; and that the Fed would be able to proceed "as planned" under a Clinton victory whereas a a Trump win would likely force the Fed back to its drawing board for new economic projections (for better or for worse), upending its normalization process. (See: USD/MXN as another gauge.)

In both cases, it appears that markets are looking through the noise this morning. The British Pound is stable amid reports that Governor Carney could stay beyond 2018, perhaps through 2021. Market participants outside of the UK will be pleased given Carney's international profile: he is well-respected for his handling of the GFC while helming the Bank of Canada; and his loss otherwise would be a major blow to the effort for the UK to navigate the Brexit waters safely.

For the US Dollar and the US elections, now that the dust has settled after Friday, we can see that polling figures are little impacted by the developments (honestly: who is still undecided at this point in the election cycle?), and in turn, interest rate expectations for the US Dollar are holding firm near 70%.

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

Read more: Better Data, Higher Inflation Expectations Lifting Yields and Euro in Short-term

--- Written by Christopher Vecchio, Currency Strategist

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

Follow him on Twitter at @CVecchioFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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