Weekly Market Outlook

Pound Traders Look to the Fed and BoJ for Once

The fallout from Brexit takes a back seat next week as pound investors’ focus turns to policy decisions from two of the world’s biggest central banks.

Federal Reserve officials are scheduled to meet Sept. 20-21, with Bank of Japan policy makers gathering over the same two days. Any signal from the U.S. that interest rates will rise could strengthen the dollar across the board, while more stimulus from the BOJ may weaken the yen.

The decisions come after the Bank of England this week kept its key interest rate and asset-purchase target unchanged, while signaling that further easing can’t be ruled out. That sentiment helped drive the U.K. currency down by the most in two months versus the dollar.

“As we await fresh direction from the Fed and BOJ, risk sentiment remains fragile, undermining those currencies which are risk or carry sensitive,” said Jeremy Stretch, the London-based head of foreign-exchange strategy at Canadian Imperial Bank of Commerce. “We are seeing the pound under pressure due to its sizable current-account shortfall, which remains set against presumptions of still-lower rates ahead.”

The pound fell 1.3 percent this week to $1.3089 as of 5 p.m. London time Friday, the steepest decline since July 8. It depreciated 0.7 percent to 85.26 pence per euro. Sterling touched a 31-year low of $1.2798 on July 6 and is down 12 percent versus the dollar since the June 23 referendum on Britain’s membership of the European Union.

BOE Decision

Minutes of the BOE meeting showed the Monetary Policy Committee voted 9-0 to keep the key rate at a record-low 0.25 percent. Officials were also unanimous on continuing with purchases of gilts and corporate bonds.

The BOE cut its key rate in August for the first time in seven years and expanded its bond buying to ward off the risk of recession after Britain voted in June to leave the world’s biggest trading bloc.

Sterling has outperformed all of its 16 major counterparts in the past month as reports from services to construction to employment showed the U.K. economy is holding up better than some analysts predicted after the decision to leave the EU.

U.K. 30-year government bonds fell this week as investors prepared for an auction of 2.5 billion pounds of gilts maturing in July 2047 on Sept. 20.

The yield on 30-year securities climbed seven basis points, or 0.07 percentage point, to 1.57 percent, while that on benchmark 10-year gilts rose one basis point to 0.87 percent.