– Despite broad US Dollar weakness, GBP/USD continues to edge lower after the surprising UK general election results.
– Focus on FOMC this week will pertain to the glide path of future rate hikes, as markets are only pricing in one more for 2017.
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The US Dollar is falling back out of favor despite last week’s late-week rally, as investors are quickly shifting their attention from the surprising results of the UK general election to the Federal Reserve’s June policy meeting this Wednesday. Yet the UK elections can’t be dismissed yet; GBP/USD continues to fall today despite the greenback exhibiting weakness elsewhere.
If history is our guide, than more British Pound weakness should be anticipated. GBP/USD fell by -2.3% on the results of the May 2010 general election (which also led to a hung parliament), and fell by another -3.2% in the following months thereafter. The spectre of a ‘hard Brexit’ may come back into focus, which would keep the Sterling pointed in the direction of more weakness.
For the US Dollar generally, the softness on approach to Wednesday’s FOMC meeting may be an omen of what’s to come. While Fed funds futures are pricing in a 100% chance of a 25-bps rate hike this week, expectations for a third hike in 2017 have been decimated; no month the remainder of the year eclipses the 60% implied probability threshold to suggest markets have a high degree of confidence in another policy move.
It’s looking like the Fed will be marking down some of their forecasts, which is implicitly a dovish move. Inherently, we appear to be headed towards a ‘dovish hike,’ whereby the Fed raises rates but cuts expectations for future policy endeavors. A reduced glide path will weigh on the greenback, as has been the case for the past year and a half; as we discussed in November 2015, the Fed’s rate hike cycle didn’t (and still doesn’t) bode well for the US Dollar.
— Written by Christopher Vecchio, Senior Currency Strategist
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