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Federal Reserve comments to shape US dollar sentiment, analysts bearish on GBP/USD

Donald Trump’s threat to impose 5% tariffs on imported goods from Mexico later this month will continue to reverberate across forex markets this week.

However, the capricious nature of the US President will not be the only factor to track for traders with the Federal Reserve’s latest speech on Tuesday, June 4th, one of many key events on the horizon.

May was a largely forgettable month for the pound as it closed 4.0% down against the US dollar over the 31-day period. The high point came on May 3rd at 1.3177 and it steadily fell to a low of 1.2559 recorded on Friday, May 31st.

The slump is largely due to the ongoing uncertainty surrounding Brexit and the Conservative Party’s quest to find a new leader as Prime Minister Theresa May prepares to exit stage right on June 7th.

The likelihood of a Brexiteer taking the top job has increased the chances of the UK leaving the European Union without a deal before the end of the year, which will continue to squeeze the GBP.

A new trade standoff between the US and Mexico could also hurt the GBP in June, especially if investors pivot to the US dollar as a safe haven.

Forex brokers will be keeping an eye on commentary from the Federal Reserve in midweek as Chairman Jerome Powell offers a timely update on policy at an event in Chicago.

The Fed has adopted a more cautious, wait-and-see approach in recent months following several interventions, but interested commentators believe two more 0.25% interest rate cuts could arrive in the near future.

Federal Reserve Vice-Chair, Richard Clarida admitted last week that it was now “very attuned” to downside risks and the possibility of rate cuts if the near term outlook dims as it attempts to sustain US growth.

“If the incoming data were to show a persistent shortfall in inflation below our 2 per cent objective or were it to indicate that global economic and financial developments present a material downside risk to our baseline outlook, then these are developments that the committee would take into account in assessing the appropriate stance for monetary policy”, Clarida noted last Thursday.

Traders will also have official data to sift through this week. The first release will come at 3PM BST on Monday with the ISM Manufacturing and Non-Manufacturing ISM surveys, which are a useful indicator for US economic activity.

Manufacturing PMI remained in expansion with a reading of 53.1 in April despite a drop compared to the previous month. A positive reading is likely again for May but the downward trend is set to continue.

On the UK front, the Services PMI due Wednesday, June 5th, will be the one to look out for as the sector now accounts for 80% of economic activity in the UK. Analysts expect a modest rise to 50.6. The IHS Markit PMI surveys will also be released before Friday.

Overall, experts generally appear to be bearish on GBP/USD as the Brexit debacle will weigh heavily for the foreseeable future, while the US dollar, buoyed by recent economic data showing 3% growth, will remain an attractive outlet for the best forex brokers.

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