Sterling pops higher, but what triggered the sharp rally?

he pound had traded fairly listlessly during the morning session, although jumped over half a percent higher against the dollar just after 3pm London time yesterday. There was no real clear catalyst for the move – no economic data was released, nor was there any political news to report. It may perhaps have been driven by a flurry of sterling demand leading up to the calculation of the daily foreign exchange benchmarks. An equally plausible rationale is that the move coincided with month-end portfolio flows, which tend to create rather aggressive and somewhat unpredictable swings in exchange rates just before the end of the calendar month.

Regardless of what triggered the move, the pound is trading well bid for the week, back up to around the 1.39 level versus the dollar and its strongest position in around two weeks. Investors had reacted negatively to ‘Freedom Day’ in the UK last week for fear that the near total removal of restrictions could lead to a surge in infection rates and a reimposition of lockdown measures down the road. So far, that has not been the case, indeed new caseloads have been dropping rather markedly in the UK in the past ten days or so, down to around 23,000 from 51,000 on 17th July. With the UK’s vaccination programme so far preventing a serious move higher in hospitalisations and COVID-related deaths, the market is growing increasingly optimistic that additional measures won’t necessarily be required. This may also be providing tailwinds for sterling, which is currently sitting comfortably at the top of the G10 performance tracker for the week.

How could the dollar react to today’s FOMC meeting?

Virus caseloads may be dropping in the UK, but the continued spread of the delta variant globally has kept a lid on risk appetite in markets in the past 24 hours. It has also caused investors to bet that this evening’s FOMC meeting may not be as eventful as it may otherwise had been. With caseloads ticking higher, we think that the outlook is too uncertain for the Fed to hint at the possibility of QE tapering later today. While we acknowledge that discussions will be had among committee members surrounding a winding down in asset purchases, we don’t expect any formal announcement in the accompanying communications. We may have to wait until the
August Jackson Hole conference or the September FOMC meeting for any clear indication as to when tapering will commence. Indeed, most FOMC members continue to see the jump in US inflation as transitory, and therefore are unlikely to be rushed into voicing support for an immediate normalisation in policy.

As mentioned yesterday, today’s Fed meeting may therefore be a neutral one for the dollar. We are likely to see a largely unchanged statement, although we do see risks that the Fed either talks up concerns surrounding the spread of the delta variant (a dollar negative), or hints that a tapering in QE is on the horizon (a dollar positive). Either way, investors will be watching closely and heightened volatility surrounding the meeting cannot be ruled out.