Market News & Insights
26 July 2016

Pound Drops as Hawks Fly

It has been a slow start to the final week in July and today’s data calendar suggest we may be in for more of the same ahead of tomorrow’s FOMC meeting announcement. Yesterday provided us with a mixed session through the day. Better than expected German IFO business confidence helped lift sentiment in Europe, a growing divergence between UK and Eurozone data evident again following last week’s PMI’s. European stocks traded moderately higher following the better than expected news from the IFO.

The US session was not so firm however as falling oil prices weighed on sentiment. US stocks receded from record highs with the Dow leading the charge lower while both NASDAQ and S&P both closed the day below Friday’s close. In currency markets the USD traded lower ahead of the two day FOMC meeting that begins today. The Euro was broadly stronger as was the JPY, suggesting risk aversion movements in markets ahead of central bank uncertainty.  There is no change expected from the Fed on Wednesday however any suggestion of additional rate hikes will favour the USD and additional greenback strength. The BOJ also meet this week with large scale easing expected on Friday, however with plenty of weakness priced in to JPY over recent weeks should Karuda fail to provide parachute money, the yen could find scope to rally.

GBP also struggled through yesterday as the BOE’s hawk, Martin Weale, changed his tone on potential easing. Weale had favored the wait and see approach for providing easing from the BOE but after last week’s dismal PMI readings which suggested extreme weakness across the UK’s economy and an almost certain drop into recessionary territory, has changed his mind. Weale said he had not expected the impact to be so severe and now feels the BOE need to act to respond. We are expecting to see a cut to the base interest rate that has remained at .5% for over 7 years, although should we see significant further poor data from the UK, QE may well be back on the cards as well. EURGBP faces upside resistance into .8420, a break above there favours .8472/.8500 area. GBPUSD finds support just above 1.3060, a break below targets 1.2976, with greater scope towards 1.2800 below.