FX round-up: Sterling takes breather ahead of Fed's rate call

Sterling took something of a breather today ahead of the Federal Reserve's policy call tonight, when the US central bank is expected to leave the country's benchmark interest rate unchanged.

At about 17:05 BST, the British currency, under pressure as polls show the Brexit campaign for leaving the European Union pipping that for Bremain on 23 June, rose 0.52% to $1.4188.

Sterling was up 0.21% to €1.2620, also making progress against most other crosses barring the aussie, against which it was down 0.1% to AU$1.9161. Tomorrow, Bank of England is expected to hold its benchmark interest rate and quantitative easing programme unchanged.

"A rare glimmer of sunlight broke through the clouds today as the fears over an increasingly likely Brexit were put on the backburner," said IG market analyst Josh Mahony, pointing to the market focus on the Fed tonight at 19:00 BST.

"Despite today’s bounce (in sterling), market sentiment is not necessarily pointing towards a recovery, with key fear barometers such as the (safe-haven) yen and treasuries continuing to attract flows," he said.

In those safe-haven assets, gold was steady at $1287.7 an ounce, while yields on 10-year UK gilts tightened 2 basis points to 1.12%. The pound gained 0.3% to 150.219 yen.

CMC Markets market analyst Jasper Lawler said sterling, which was calm after a better-than-expected UK jobless rate of 5% for the April quarter, had taken "a bit of a Brexit breather" today, in stark contrast to recent turns.

He observed currency markets were mostly flat before US rate call, barring a jump in the pound amid short-covering and strong UK labour market data.

Meantime, at about 17:05 BST, the dollar lost traction against most of its major crosses, excepting a 0.3% gain to CA$1.2911. It ebbed on the euro, aussie, kiwi, rand and yen. The dollar-spot index was up 0.22% to $94.720.

Today, the US Empire State manufacturing index improved, while the US producer-price index came in more than expected. US industrial production and capacity utilisation were both worse than forecast.

"We doubt that the Fed hiked rates, given the surprisingly weak (non-farm payrolls) Employment Report for May and uncertainty surrounding next week’s vote on the UK’s membership of the EU," said Alex Holmes at Capital Economics.

"That said, we don't think that the state of the US labour market or a vote for Brexit would prevent the Fed from raising rates in the future by more than investors currently expect." Generally, the market anticipates at least a couple of Fed hikes this year.

"Against this backdrop, we forecast a gradual sell-off in US Treasuries, with the 10-year yield ending next year around 3.0%," said Holmes.

"We also expect the dollar to strengthen, although not to the same extent as in 2014 and 2015," he said.