The pound has remained under pressure as declining U.K. interest rate expectations have weighed on the currency. Although, we have seen the correlation between OIS and the GBP/USD slip, they still explain 19% of price action.
[B]GBP/USD[/B]
The pound has remained under pressure as declining U.K. interest rate expectations have weighed on the currency. Although, we have seen the correlation between OIS and the GBP/USD slip, they still explain 19% of price action. Yield expectations have started to gain in influence as the potential for a change in policy grows but recent remarks from the BoE has significantly lessoned the chances of tightening from the MPC in the near-term. Therefore, risk sentiment is still a force to monitor when determining price direction as it explains 40% of volatility. Indeed, recent weakness in equity markets has coincided with the sterling’s slide and today’s rally helped stem GBP/USD losses. Additionally, the rising outlook for U.S. interest rates has also become a weighing factor for the pair as its influence increased to -.14 from -0.087 in the past month. Many expect that the FED will be the first of the two central banks to start tightening despite the FOMC pledging to keep rate slow over the near-term.
[B]BoE Interest Rate Expectations[/B]
The release of the BoE minutes helped raise interest rate expectations for a brief moment on the back of a 9-0 vote to refrain from adding to its asset purchase program. Market participants saw this as a sign that the central bank has completed its liquidity providing efforts and that the next step would be to plan an exit strategy. However, rumors that policy makers were considering lowering the deposit rate have cast doubts on the committee intentions, which have helped fuel sterling weakness. Concerns are growing that the government’s stimulus efforts will have little lasting impact on the economy. Indeed, the MPC stated that there remains considerable slack in the economy and that unemployment will continue to rise. . Additionally, Governor King’s comments that a weaker pound was “helpful” to exporters, was taken as a sign that the central bank will refrain from tightening in order to promote a weak pound.
[B]FOMC Interest Rate Expectations[/B]
Fed funds futures are currently pricing in a 2.2% chance of a rate hike by the end of the year which is slightly higher from a week ago. Interest rate expectations are lower from a month ago following the FOMC rate decision where they pledged to keep rate low for the foreseeable future. Regardless, there still is a 25% chance that they will raise rates at the beginning of the year and the expected increase in interest rate differential is started to influence price action for the GBP/USD.
[B]Risk[/B]
A pick up in M&A activity helped stocks end their recent brief slide and continue their current up trend. Traders continue to buys up stocks despite concerns that current valuations are out pacing potential growth. It may take clear evidence that a full blown recovery isn’t under way and that downside risks remain to temper appetite. This may come in the form of Friday’s NFP report, but watch for reaction to early indicators like the ADP private jobs report and the ISM manufacturing report. Consumer confidence, final 2Q GDP figures and pending home sales will also impact sentiment.
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