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FX round-up: Sterling mixed amid May's hot chips, Brexit divorce bills ahead of Fed rate call

By Andrew Schonberg

Date: Wednesday 03 May 2017

FX round-up: Sterling mixed amid May's hot chips, Brexit divorce bills ahead of Fed rate call

(ShareCast News) - Sterling is mixed on Wednesday afternoon as traders hunker to await the US Federal Reserve's interest rate decision tonight.
The US central bank was widely expected to hold interest rates unchanged at 19:00 BST, but the language of the accompanying Federal Open Market Committee statement would be scrutinised.

"Expectations around that (FOMC) statement are for a slightly hawkish tone, but that would be rather counter to recent data which has been on the weaker side," said Michael Hewson, chief market analyst at CMC Markets UK.

At 16:59 BST, sterling was down 0.2% to $1.2913, and was lower 0.09% to €1.1828. It was also off against the loonie and rand, but up on the aussie, kiwi and yen.

The dollar-spot index was up 0.1% to $99.077.

"The US dollar has been one of the stronger performers ahead of today's FOMC rate meeting," said Hewson, noting that Brexit matters were again in play as regards sterling.

"Traders appear to be interpreting the events of the last 24 hours as the opening salvoes in what is likely to be a long and protracted staking out of positions ahead of the start of talks later this summer," said Hewson.

These opening moves, festering around the spectre of a possible €100bn Brexit divorce bill and resultant political jawboning appeared to have left sterling unaffected.

"Reports that the EU might look to charge the UK a €100bn exit bill and a vague set of EU negotiating positions set out by chief negotiator Michel Barnier had minimal impact on the British pound," said Jasper Lawler, senior market analyst at London Capital Group.

"The UK general election has grabbed much of the focus for forex traders away from Brexit," he said. These, along with the second round of France's presidential election and puerile coverage of UK PM Theresa May devouring hot chips in Cornwall.

IG market analyst Joshua Mahony continued: "It is clear that the powers that be in the EU are setting the groundwork for two years of confrontational and tense negotiations.

"To an extent, the outperformance of the pound amid such pessimistic tones out of the EU points towards a market that has factored in a hard Brexit," he said.

He pinned much of this week's sterling strength to the resurgence of the UK manufacturing and construction sectors, both of which busted forecasts.

"With tomorrow's services PMI reading up ahead, another outperformance could see the FTSE suffer at the hands of yet another strong day for the pound."

Meanwhile, the US dollar made progress against most major currencies, barring the loonie.

"Much stronger than expected US service sector data and its implication for higher interest rates sent gold spiralling below $1250 per oz to its lowest in a month," said Lawler.

"The reaction in forex market was more muted but could come to fore following the Fed meeting."

Finally, slides in commodity prices had weighed on the Australian dollar, with concerns about a slowdown in China prompt a scaling back of expectations around future Chinese demand.

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