Politics rather than macroeconomics continues to be the driving force behind British Pound exchange rate movement. Even yesterday’s testimony from Bank of England (BoE) Governor Mark Carney in front of MPs revolved around the risks that remain in the event of a no deal Brexit, although with Sterling so deflated, the market seems to be struggling to find the enthusiasm to send the currency any lower, at least for now. US Gross Domestic Product (GDP) data could provide the Federal Reserve with some room for manoeuvre in terms of justifying a rate cut, while the Pound has fallen to four-and-a-half-month lows against the South African Rand (GBP/ZAR).
Carney Talks Up Rate Cut – Pound Finds Support Against the US Dollar (GBP/USD)
Bank of England Governor Mark Carney appeared before MPs yesterday and talked up the possibility of a quick cut in interest rates should a no-deal Brexit materialise later in the year. However, despite the pessimism, the Pound has largely managed to fend off further sustained losses. The Pound-US Dollar exchange rate (GBP/USD) has repeatedly found support around the week’s lows at the 1.2660 level, with evidently little temptation to drive the pair any lower.
No-Deal Brexit Risk Looms Large – GBP/EUR Softens on UK Political Uncertainty
With a quiet day ahead in terms of the UK economic calendar, attention will once again be focused on the political agenda. In the event that Boris Johnson wins the Conservative Party leadership election, there remains a real risk that a no-confidence motion against the new government would prove successful in the House of Commons, although given the timings here, conducting a general election ahead of the October 31st deadline would remain something of a challenge. The UK’s political uncertainty continues to drag on the Pound Euro exchange rate (GBP/EUR), although as with Cable (GBP/USD), the appetite to push beyond recent lows appears limited.
US GDP could make it Difficult for Federal Reserve to Cut Interest Rates
The final US GDP reading for the first quarter is set to be published today. This is forecast as seeing a modest upward revision from 3.1% to 3.2% and again, that trajectory could make it harder for the Federal Reserve to justify easing monetary policy next month. Arguably, the risk to watch for here is a meaningful shortfall, as this would have the potential to initiate further broad-based US Dollar selling. The DXY Dollar Index may have rebounded from a test of three-month lows at the start of this week, but further downside pressure will prevail if macroeconomic conditions suggest that the Fed needs to be easing monetary policy.
Why Did it Move – Pound to South African Rand (GBP/ZAR)
The Pound may be off across the board given the political uncertainty, but losses against the South African Rand (GBP/ZAR) have been particularly pronounced. The pair is now trading at levels not seen since mid-February, although the overriding force here appears to be those mounting concerns of a US rate cut. International investors continue to chase yield, so despite the weakened domestic economy, the Rand is managing to find some support.