US Dollar May Rise vs GBP if BoE Outlook on Brexit Spooks Markets

GBP/USD, Brexit, BoE Rate Decision, US Dollar – TALKING POINTS

• GBP/USD may fall if BoE reinforces growing no-deal Brexit fears
• US Dollar and CHF may rise on risk-off tilt in European session
• Is GBP/USD aiming to retest multi-month descending resistance?

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US Dollar may continue its rise following the FOMC rate decision if the Bank of England’s rate decision and outlook on Brexit spooks markets and puts a premium on liquidity over yield. As the region’s de facto haven – apart from German Bunds – the Swiss Franc may also rise. However, investors may have trepidation in gaining exposure to the latter as the SNB also prepares to deliver its rate decision and outlook on policy.

FOMC Recap: What Happened?

As forecasted, the US Dollar rose after the Fed delivered a 25-basis point rate cut and cooled aggressive easing expectations. Chairman Jerome Powell reiterated that the central bank is employing a data-dependent approach to policy and will cut rates if the prevailing economic circumstances warrant it. Markets also panicked when they found out the board was divided on further easing and taking a more prudent approach.

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Bank of England and Brexit

An overwhelming majority of analysts see the Bank of England holding the benchmark interest rate at 0.75 percent as uncertainty around Brexit continues to cloud the future of the United Kingdom’s economy. Much like the BCB in Brazil, the BoE has to carefully take into account the political environment it finds itself embedded in because the outcome could have radical implications for monetary policy.

Since October, year-on-year core CPI has been slipping below the central bank’s two percent in large part due to Brexit turmoil and trade wars undermining consumer/business confidence. But the BoE has to be careful not act prematurely the uncertainty about the EU-UK divorce looms over the heads of policymakers. It is unclear what the economic impact of what either scenario could be and therefore warrants a cautious approach.

GBP/USD Technical Analysis

GBP/USD has recovered almost five percent after touching a three-year low at 1.1959. The pair appear to be losing steam as they approach familiar but intimidating descending resistance not encountered since May. However, the pair appears to be topping around 1.2500 as it struggles to extend beyond it for over half a week. Unless the pair is able to close higher with confirmation, capitulation appears to be the path of least resistance.

Chart of the Day: GBP/USD Recovers Almost Five Percent After Reaching Three-Year Low

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--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

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