Good morning,

The markets have opened with more dollar strength today in the wake of the US policy announcement.

Why is this, when the Federal Reserve cut rates for the first time in 11 years, usually an action that eases currency appreciation?

We saw that this cut was majorly priced into the rates in the lead-up and, with a more hawkish sentiment around the future policy indicating that it was not the start to a “lengthy easing cycle”, this provided the upside for the dollar.

What does this mean for the pound? Unfortunately, short term weakness doesn’t appear to be alleviated and the UK will be strapping in as the ride to October 31st and beyond will be bumpy, to say the least, with the government putting in place a £2.1bn airbag in preparation for a no-deal Brexit.

There is now added pressure on Boris Johnson with analysts sceptical about how long he can ignore the worrying depreciation of the pound and continue with his hard stance.

The Bank of England is passed the baton today for policy decision at 12:00 GMT alongside the inflation report. With no change anticipated, markets will be more interested in Mark Carney’s updated view on Brexit. The policy and forecasting have been based on a smooth transition and so an element of recalibration seems necessary.

The inflation data, which has likely been blurred by the currency depreciation as of late, will need to be considered under a new light also.

EURUSD finds a two year low, with the policy divergence powering the pair. The 1.11 mark has firmly been broken and the euro doesn’t see much optimism here.

Outside of this focus, we will see emerging markets have to deal with the hawkish nature of the Federal Reserve in the short term, while the Japanese Yen gives up some of its haven strength back to the dollar, with the USDJPY gaining 0.4% – the highest since May.

Have a great day.

Author: Ross Hammond, Senior Corporate Account Manager