Global Themes

GBP/USD sinks 1% after Fed minutes
- Dollar flops and pops after mixed Fed 
- ECB to look hawkish again? 
- Volatile Sterling continues


It was an eventful evening for USD denominated currency pairs after the minutes of the Federal Reserve’s (Fed) January meeting were released.

Ahead of the event, and during the subsequent volatility, the US Dollar Index (which tracks the dollar’s strength against a basket of currencies) was almost flat, having lifted almost 2% towards 90 over the last few days in anticipation of a more hawkish message.

The minutes revealed Fed members believe inflation should rise this year, but some see a risk of it lagging to target. Although it appears some conflicting views lie amongst Fed policymakers on the pace of interest rate rises, the upbeat message on the US economy and anticipation of ‘further’ rate hikes allowed US Treasury yields to rise, renewing USD demand. The dollar tends to move with the direction of Treasury yields because currency traders are drawn to currencies where interest rates are attractive.

Initially GBP/USD pounced and hopped over the $1.40 handle, gaining over 50 pips in a few minutes while EUR/USD rose to $1.2360. However, the dollar bears staged a comeback sinking cable towards the intraday low of $1.3905 and EUR/USD sub $1.23. Cable currently trades below $1.39, having found support around $1.3860, but could be on for its 5th consecutive day of losses today. EUR/USD has slipped to 1-week lows near $1.2250 but should find support around $1.22 as traders look to multiple speeches by Fed committee members later this afternoon. 


The minutes from the European Central Bank’s (ECB) January meeting will be released at 12:30pm today.

The last time the minutes were released, they showed a split in ECB policymakers’ views on how quickly to start fully unwinding stimulus measures after September. EUR/USD has been range bound between $1.22-1.25 since January, with investors not having enough confidence in the US Dollar for it to break any lower, while at the same time wanting to see if the outlook from the ECB is hawkish, with even the potential for interest rates to start to rise this year, before we can see a break above $1.25.

Having hit resistance at $1.25 three times since January before tailing back off, this key level looks a long way off today. However, any more pressure from members of the ECB to unwind stimulus faster will mean that the next ECB meeting on March the 8th will have even more significance than usual. ECB President Mario Draghi has stressed in the past that further stimulus measures are still an option as he has not wanted the Euro to strengthen any more rapidly than it already has.

However, a more hawkish ECB could become the new normal from 2019 with 4 of the 6 council members leaving, including Mr Draghi, and Germany pushing hard for the presidency spot.


Yesterday saw another choppy day for Sterling, after unemployment ticked higher to 4.4% triggering a pound sell off.

Later in the day Bank of England (BOE) Governor Mark Carney spoke to the Treasury committee, telling them that the impact of a weaker pound is at its peak point of affecting inflation, indicating that the BOE won’t need to raise interest rates to slow inflation. Sterling fell against both the Euro and Dollar after the unemployment number, GBP/EUR fell to a low €1.1288 but then later saw a recover after Mark Carney’s comments and settled in the €1.13 level.

Governor Carney also continued to raise his concerns over Brexit, warning the continued economic uncertainty around the UK’s exit could see 5% knocked off UK wage growth this year – wage growth picking up this year has been outlined as a key indicator to when the Bank could start to raise interest rates.

Today the focus for the pound could switch back to Prime Minister Theresa May and the infighting within the Tory Party. The PM will invite 11 of her most powerful colleagues to thrash out an agreement on how to proceed on Brexit. Staying close to the European rulebook or breaking quickly away will be main topic of discussion. Ms May will want to resolve the Tory inhouse fighting before she delivers her speech next week to announcing the UK’s negotiating goals.

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