Losing traction
However, dovish comments made by the Fed chair Janet Yellen at the last Federal Open Market Committee (FOMC) meeting this week, caused the dollar to pull back against most major currencies including the pound.
In her speech to the Economic Club in New York on Tuesday, Yellen said that US economic growth had weakened and would lead to gradual increase in interest rates by the Fed. She also said the FOMC is not currently focused on monetary policy tightening.
Stanton said: “The Fed, and foreign exchange traders, reduced their expectations of further rate hikes this year to just two – and for these to be highly dependent on ongoing strong economic data. This helped pull the dollar back against most major currencies, including sterling.”
Piling into the ‘greenback’
Despite the weakening dollar, Stanton believes that uncertainties surrounding the Brexit vote in June are making the currency very attractive to investors.
“Post-Brexit, either the currency will sink or the Bank of England will have to raise interest rates to protect sterling. Sterling might survive, but higher interest rates risk inducing a recession.”
He said: “This situation, combined with the uncertainty surrounding the possibility of the UK leaving the EU, is driving investors to pile into the greenback. They are certainly not resting on their laurels as far as sterling is concerned.”
“Investors are using the recent strength of sterling against the dollar as a major dollar-buying opportunity, in the event of Brexit. It can be expected that this will continue until the in/out referendum to decide Britain’s place within the EU.”
Run on the pound?
Stanton warns there could be run on the pound if Britain decides to leave the EU, predicting that the Bank of England may have to raise interest rates, resulting in a recession.
He said: “A run on the pound is possible if Brexit appears likely.
“Post-Brexit, either the currency will sink or the Bank of England will have to raise interest rates to protect sterling. Sterling might survive, but higher interest rates risk inducing a recession.”
