Theresa May Due to Reveal Vision for Brexit Next Week, GBP/USD Under Pressure
Market optimism ahead of next week’s Brexit speech from Theresa May has been dented today after Jeremy Hunt claimed there was no way the UK could remain a member of the customs union after leaving the EU, although the GBP/USD exchange rate has held mild gains.
Hunt claimed that the recent discussions between Cabinet members over the UK’s Brexit position had seen officials agree that the UK must retain ‘the right to choose to diverge’.
This could weigh on Pound Sterling as the weekend approaches, with GBP/USD exchange rates potentially weakening as markets reassess forecasts for the impact of a ‘Hard Brexit’.
Anticipation of Further Clarity Supports GBP/USD Exchange Rate Higher
Theresa May and her Cabinet heavy-hitters marathoned talks on Wednesday night on the UK’s desired trade and transition arrangements with the EU when negotiations begin again next month, with the GBP/EUR exchange rate rising on market hopes for further clarity.
With little else on the UK data calendar today, market focus has been drawn to next week and the potential for the outlook over Brexit to become more detailed.
May is expected to outline the government’s view in a speech next week, which could help ease the miasma surrounding negotiations and provide businesses and investors with more direction regarding the UK’s exit from the bloc.
There are also suggestions that Labour leader Jeremy Corbyn could outline his views on the UK’s relationship with the EU in a speech next week as well, with some now expecting him to support an amendment to legislation from Tory rebels that would force the UK government to maintain access to the customs union.
GBP/USD Exchange Rate Inches Higher as US Dollar Remains on Uncertain Footing Following Publication of FOMC Meeting Minutes
The recent release of minutes from the January Federal Open Market Committee (FOMC) monetary policy meeting continues to weigh on the US Dollar this morning, allowing the GBP/USD exchange rate to scrape minor gains.
The minutes have somewhat confused markets, leaving the question of just how much the Federal Reserve is planning to tighten monetary policy this year wide-open.
On the one hand, the minutes stated:
‘A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate.’
Markets were particularly interested by the use of the word ‘further’, with many suggesting that this could be a sign that the Federal Reserve is gearing up to increase borrowing costs four times this year, instead of the three initially predicted at the start of the year.
The minutes also noted that further adjustments to monetary policy would need to be ‘gradual’ - a phrasing that usually indicates a more cautious approach to rate hikes.
The US Dollar is also being restrained by the fact that the January policy meeting was the last to be attended by Janet Yellen as Chair of the Federal Reserve. Jerome Powell has now stepped into the role and while, by all accounts, his attitude seems closely aligned to that of Yellen, there is the potential for his leadership to take the Fed in a completely different direction.
Forecast: Will BoE’s Ramsden Give UK Productivity Forecast that Boosts or Weakens GBP/USD Exchange Rate?
There is no UK data on the economic calendar today, but Bank of England (BoE) Deputy Governor Sir David Ramsden is set to give a speech on the topic of productivity at midday.
Productivity growth has been one of the UK’s greatest challenges over the past few years, with output per worker failing to increase despite broad strength in the labour market.
This restrained pay growth has kept a lid on household incomes and ensured that consumer spending remained too weak to push inflation towards the Bank of England’s 2% target needed to initiate interest rate hikes.
Of course, the vote for Brexit radically changed the inflationary landscape thanks to the huge decline seen in Sterling in reaction, but this just exposed another problem: week pay growth. When the rate of consumer price growth is taken into account, so-called ‘real’ pay is falling at a significant pace.
Ramsden’s view on the UK’s ‘productivity puzzle’ could therefore have a notable impact upon the Pound; if he claims the situation is improving the GBP/USD exchange rate could trend higher, but if the Deputy Governor seems to be of the belief that the problem will persist for some time, Pound Sterling could fall against the US Dollar.
The only developments of note on the US data calendar are speeches from policymakers.
William Dudley and Eric Rosengren will appear together at a panel event to speak on the topic of the Fed’s balance sheet, while later this evening John Williams will discuss the outlook for the US economy.
Both of these topics could be influential, with the former potentially giving clues on how the Fed plans to dispose of the nearly US$4.5 trillion worth of treasuries amassed during its huge quantitative easing programme in response to the financial crisis.
Meanwhile the latter could help markets get a better idea of the longer-term outlook for interest rates, so there is potential for volatility from USD in response to comments from any of these policymakers, as markets look for some clarity regarding the Fed’s leaning.