Eyes on central banks
after sterling shocker
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[June 12, 2017]
By Patrick Graham
(Reuters) - The dollar dipped on Monday on the run-in to Wednesday's
decision on U.S. interest rates, while Britainís pound was back under
pressure after a 2-cent fall following elections which threw Europeís
second-largest economy into political chaos.
There was some support for the euro from French and Italian elections
but the week was set to be dominated by central bank meetings and UK
Prime Minister Theresa May's efforts to form a workable administration
after losing her majority.
With a fourth rise in U.S. rates in 18 months now fully priced-in for
Wednesday, Bank of America Merrill Lynch's head of G10 currency
strategy, Athanasios Vamvakidis, pointed to the chance of a weaker
greenback after the meeting.
But he also warned that the Bank of Japan just over 24 hours later might
prompt some more retracement of the yen's 4-percent gain since mid-May.
"The hike by the Fed is fully priced but the language will be dovish,"
"What will be interesting will be the BOJ - there have been headlines
that the BOJ has been discussing an exit from emergency stimulus. They
may well want to bite back against that (and) the yen has come a long
way in the past few weeks."
The dollar was marginally lower at 110.21 yen <JPY=>, having retreated
from Friday's one-week high of 110.815 yen. Against the euro it dipped a
quarter percent to $1.1222 <EUR=>, compared to a seven-month low of
$1.1285 set in early June.
As May scrambles to pick up the pieces and reunite her Conservative
Party before Brexit negotiations due to start next week, the economic
signs for the pound continue to worsen.
Figures from credit card firm Visa showed British consumers cut their
spending for the first time in nearly four years last month, as
households turned more cautious even before the shock election result.
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Pound coins are seen in front of displayed stock graph in this
picture illustration taken June 9, 2017. REUTERS/Dado Ruvic/Illustration
Against that is the hope of a softer approach to the Brexit talks that
Friday's election results have engendered in markets.
Worries that the process would take Britain out of the lucrative
European single market have left the pound around 20 cents weaker than
when Britain voted to leave the European Union a year ago.
"Based on parliament as it stands, Theresa May would be able to approve
a soft Brexit but not a hard one," said Bank of America Merrill Lynch's
Sterling fell another half a percent in morning trade, sinking as low as
$1.2681 <GBP=D3>, and 88.45 pence per euro.
"Our forecasts are under review but we have been one of the more bullish
houses on the street and it is fairly clear that the risks are to the
downside," said Barclays' strategist Hamish Pepper.
"The uncertainty that the result brings means that you have a degree of
risk premia re-establishing itself. The currency is vulnerable to that
in the near term."
(Writing by Patrick Graham; Editing by Andrew Heavens)
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