GBP Pares Poll Losses, Fed Next
The pound is paring its losses following a 100-pip drop caused by an update to a highly-influential election poll. US CPI is due next, followed by the FOMC decision later in the evening --widely expected to keep rates on hold. The Fed has succeeded in keeping itself out of the conversation (for now) as the countdown to US elections starts. Market emphasis shifts towards the Fed's rising purchases of repos and the onset for possible QE4 (more below).
The pound tumbled by more than a full cent after Tuesday's NY Close after a pair of polls showed slipping Conservative majority just ahead of Thursday's vote. The YouGov MRP model was a rare poll that showed a hung parliament ahead of the previous election so it carries extra weight. In late November it showed Conservatives with a 68-seat majority.
The polls, however, picked up on a renewed shift towards Labour in the final days and now see just a 28-seat majority. They also said a hung parliament was within the margin of error in what would be a nightmare scenario for the pound, especially with the DUP in danger of turning its back on Boris Johnson.
A separate model from Focaldata hours earlier showed a similar trend. They pegged the majority at just 24.
We are now certainly in the gut-check moment ahead of the vote. No trader has forgotten the surprises on the 2017 election night, or the Brexit referendum and these numbers are a stinging reminder of the risks. Cable fell more than 100 pips in the aftermath of the polls to 1.3108 but has rebounded to 1.3160 in Lodon trade.
Ultimately, that leaves more upside for the pound if Johnson prevails with a comfortable majority, but would-be buyers are more apt to wait until the fog clears at this point.
Compounding the uncertainty at the moment is the FOMC decision on Wednesday. Expectations for any meaningful change in policy are minimal but expect a small downgrade in commentary on consumer spending. A research report from Credit Suisse also got plenty of attention. It warned that the market is underestimating the probability of year-end liquidity stress and raises the possibility the Fed could be forced to buy bonds.
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