The Pound/US dollar exchange rate has dipped slightly from yesterday’s eight-week high, relinquishing its early gains as analysts scrutinised the Bank of England’s (BoE) latest financial stability report.
The pound is currently at around $1.330, down from the day’s best levels of $1.334.
Investors were initially upbeat upon the release of the BoE’s report as it suggested that all of the UK’s big banks had passed its stress test for the first time since the financial crisis, adding that banks should be able to cope with a “disorderly” Brexit.
The BoE had previously warned banks to build up capital reserves in light of ballooning levels of consumer debt in the UK, with policymakers fearing that a slight downturn in the economy would be disastrous for financial institutions.
However, while BoE Governor Mark Carney said that banks would be able to manage even in the event of a “no-deal” Brexit, he stressed that this would be “painful”.
Talking about a no-deal Brexit Dr Carney said; “It is not a good scenario… it is one we are all working to avoid as it has some quite material economic costs, even if the financial system continues to operate through it.”
The stress test also noted a number of other Brexit concerns that may impact the UK economy, including the way in which many banks purchase and sell financial insurance between the UK and the EU.
These trades are worth a dizzying £26 trillion, and without legislation in place from both the UK and the EU, the BoE warns that this may lead to financial instability.
Meanwhile, the US dollar is on a stronger footing today in the wake of yesterday’s stronger-than-expected US housing figures.
According to data released by the US Commerce Department, domestic new home sales leapt from 645,000 to 685,000 in October, easily surpassing expectations that sales would fall to 625,000 and reaching their highest levels in a decade.
Looking ahead, the GBP/USD exchange rate may be able to recoup some of its losses later this afternoon following a number of speeches from Federal Reserve policy makers.
With markets increasingly sceptical over whether the Fed will continue its current pace of monetary tightening next year, any hint of doubt from officials is likely to weigh on the US dollar.
However, Sterling may still struggle to take advantage of any weakness in the US dollar should investors remain worried over the state of Brexit negotiations, with talks appearing to stall over questions relating to the Irish border.
Coffee Times News