The pound rose against the dollar on Wednesday, as the greenback was under pressure following the release of disappointing US retail sales figures for August.
The GBP/USD pair rose higher to weekly tops, despite the Brexit impasse and the latest saga with Boris Johnson’s Internal Market bill.
Wednesday's main event was the highly anticipated FOMC monetary policy decision - where rates look set to remain stable at near zero - and updated economic and inflation projections, ahead of Thursday’s BoE meeting. Due to the key FOMC event, trading opportunities and volatility around the GBP/USD currency pair might arise ahead of the event.
The pound was also supported after Justice Secretary Robert Buckland hinted the Government could amend the Internal Market Bill in order to compromise with Tories criticising the PM for breaking an international treaty and avoid a rift within the Conservative party. The government’s change of heart could help soften the EU’s stance and resume negotiations with the EU.
Buckland said that the original plans in the Bill could be made "acceptable to all Conservative colleagues".
With investors digesting the political reality and remaining confident that a deal is still possible, the pound was lifted after the initial news of the Internal Market bill.
"Outsized moves in GBP ... have injected a sizeable risk premium in GBP. It's now trading at a decent discount on our short-term valuation, underscoring that some of the recent Brexit news has already been priced in. At the very least, this backdrop suggests that in the coming weeks GBP would benefit more from good news rather than sink further on bad news. We still expect more volatility but risk/reward favours taking profit at these levels," said Mark McCormick of TD Securities.
Bank of England Policy and Interest Rate Decision on Thursday
The Bank of England will try and assess on Thursday the UK’s economic recovery and whether it needs to adjust its policy to offer more monetary support. For many economists, now it is not the right time to make significant changes to its package. Adding to the Bank’s woes about the UK economy comes the UK inflation which fell to its lowest level in nearly five years, to an annual 0.2%, far away from the Bank’s official 2% target.
The Bank is expected to take action in its November meeting, as the economy slowly recovers. According to the Organization for Economic Cooperation and Development forecast released on Wednesday, UK gross domestic product would shrink by 10.1% this year, while the economy is forecast to rebound in 2021. Given the political and economic uncertainty, the BoE will possibly wait and see what kind of fiscal stimulus is necessary to support the economy. But Reuters noted that “While the central bank is widely expected to hold fire, policymakers are likely to conclude that downside risks to the economy are rising for the economy due to rising Brexit uncertainty and renewed restrictions on social activity.”
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