GBP/USD – Pound Steady as BoE Holds Pat on Rates

GBP/USD has edged higher on Friday, after posting losses in the past two daily sessions. Currently, the pair is trading slightly above the 1.24 line. On the release front, British CBI Industrial Order Expectations climbed to 0 points, the first time the indicator has not posted a decline since March 2015. In the US, today’s highlight is Building Permits. The indicator is expected to remain steady at 1.24 million. There were a host of releases out of the US on Thursday. CPI and Core CPI both came in at 0.2%, also matching the estimates. Other key events looked sharp, as unemployment claims dipped to 254 thousand, while the Philly Fed Manufacturing Index surged to 21.5 points, well above expectations.

On Thursday, the BoE maintained interest rates, which have been pegged at 0.25% since August. As well, the bank’s asset purchase program remained at 435 billion pounds. The British economy has performed better than the BoE expected since the Brexit vote in June, which resulted in the bank dropping plans to cut rates in October. Instead, the bank adopted a neutral stance for monetary policy. With inflation levels rising, some analysts are predicting that the BoE could actually raise rates in early 2017. However, on Thursday the bank said that with the pound gaining strength since November (especially against the euro), inflation could weaken, which would lessen the need to raise rates.

The Federal Reserve raised the benchmark rate hike by a quarter percent to 0.75%.  This move was widely expected and priced in by the markets at close to 100%. Still, the sheer magnitude of the move triggered a sharp rise by the dollar against most major currencies. The British pound has also lost ground, slipping 1.8% since the Fed announcement on Wednesday.

In recent months, Federal Reserve Chair Janet Yellen has worked hard at improving transparency with the markets, and the Fed should get full marks for getting out the message of a December rate hike. This marked the first rise since December 2015 and only the second rate hike since 2008. In its rate statement, the Fed sounded positive about the economy, noting that the “labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year“. As well, the Fed revised upwards its forecast of US economic growth to 1.9% in 2016 and 2.1% in 2017, slightly higher than the Fed’s September estimates. What’s next for the Fed? In September, Fed officials said they expected two rate hikes in 2017, but the Fed is now projecting three or even four hikes next year. However, projections can change based on economic conditions, and the markets haven’t forgotten that after the hike in December 2015, the Fed said it expected to raise rates four times in 2015, but ended up raising rates only once. As well, the wild card of Donald Trump could also play a critical role in monetary policy. Trump’s economic platform remains sketchy, apart from declarations that he will increase government spending and cut taxes. If Trump’s economic policies heat up the economy and boost inflation, we could see a number of rate hikes in 2017.

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GBP/USD Fundamentals

Friday (December 16)

• 6:00 British CBI Industrial Order Expectations. Actual 0 points. Estimate -5 points
• 7:00 BoE Quarterly Bulletin
• 8:30 US Building Permits. Estimate 1.24M 
• 8:30 US Housing Starts. Estimate 1.23M

*All release times are EST

* Key events are in bold

GBP/USD for Friday, December 16, 2016

GBP/USD December 16 at 6:45 EST

Open: 1.2421 High: 1.2453 Low: 1.2382 Close: 1.2420

GBP/USD Technical

• GBP/USD showed limited movement in the Asian session and has posted small gains in European trade
• 1.2351 is providing support
• 1.2471 remains a weak resistance line

Further levels in both directions:

• Below: 1.2351, 1.2272 and 1.2111
• Above: 1.2471, 1.2620 and 1.2778
• Current range: 1.2351 to 1.2471

OANDA’s Open Positions Ratio

GBP/USD ratio is unchanged in the Friday session. Currently, long positions have a majority (57%), indicative of trader bias towards GBP/USD reversing directions and moving upwards.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.