The pound is rangebound against the US dollar and the majority of its other peers this morning as the Conservative leadership contest continues to drag on Sterling sentiment. Five of the six remaining contenders to replace Theresa May clashed on Sunday in a televised debate, which saw the candidates argue over whether to re-open negotiations with the EU and their stance on a no-deal Brexit. Pound investors will be paying close attention to the next round of voting on Tuesday, with the pound likely to remain volatile in the meantime amidst elevated political uncertainty. At the same time, while the US dollar may be trading robustly this morning, analysts are beginning to forecast that the eighteen-month rally in USD may be coming to an end.
This outlook is driven by suggestions that the US-China trade dispute is starting to bite back at home, which combined with up to two rate cuts from the Federal Reserve this year is likely to take the shine off the US dollar.
Analysts at ING said: “Our house view of an escalation of the trade conflict over coming quarters – and more importantly at least two cuts from the Fed – suggest USD has indeed peaked.
“The fact that US trade wars are hitting home – and that we don’t expect a cessation in the conflict until early 20 – has harmed the US dollar.”
Looking to the week ahead, movement in the exchange rate is likely to be focused in the latter half of the session as the Federal Reserve and Bank of England (BoE) both hold their latest policy meetings.
While no policy changes are expected from either bank this week, investors will be paying close attention to their forward guidance.
In terms of the Fed this forward guidance is widely expected to outline plans for a rate cut later in the year.
This could prompt some volatility in the US dollar, despite the cut having already been priced in by markets.
Meanwhile, for pound investors the focus will be on whether the BoE still believes that markets are ‘underestimating’ the pace at which it will raise rates, or whether a deteriorating global economy will lead to a more dovish outlook from policymakers this month.