GBP/USD – Fed Rate Fallout Weighs on Pound

GBP/USD has posted considerable losses on Monday, erasing the gains seen in the Friday session. In North American trade, the pair is trading at the 1.24 line. On the release front, it’s a subdued start to the week. US Flash Services PMI slipped to 53.4, short of the forecast of 55.2. This points to weaker growth in the services sector than expected. There are no British releases on the schedule.

There were no surprises from the Bank of England on Thursday, as the BoE maintained interest rate levels at 0.25%. As well, the bank’s asset purchase program remained pegged 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, in a statement 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’s quarter point hike to 0.75% 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, declining 2.4% since the Fed announcement on Wednesday. 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.

GBP/USD Fundamentals

Monday (December 19)

• 9:45 US Flash Services PMI. Estimate 55.2. Actual 53.4
• 18:30 Federal Reserve Chair Janet Yellen Speech

*All release times are EST

* Key events are in bold

GBP/USD for Monday, December 19, 2016

GBP/USD December 19 at 10:05 EST

Open: 1.2487 High: 1.2502 Low: 1.2389 Close: 1.2391

GBP/USD Technical

• GBP/USD was flat in the Asian session and has posted strong losses in European trade. The pair is showing little movement in the North American session
• 1.2351 is providing support
• 1.2471 has switched to a resistance role following losses by GBP/USD

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 continues to show little movement and is unchanged in the Monday 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.