US Dollar Outlook: Pound Sterling in the Red as Markets Predict pro-USD Fed Decision

By Rob Samson

The US dollar (USD) has today advanced against the British pound sterling however the outlook appears to favour further gains for the GBP. The US Fed is now the biggest hurdle to the USD outlook.

Updated: The U.S. dollar was mixed in volatile overnight trade, with market focus still largely on today’s FOMC monetary policy announcement.

"America’s central bank is widely expected to follow up last month’s surprise $10 billion reduction in monetary stimulus with another taper of $10 billion in its monthly bond purchases. Such a move would keep the Fed on its expected schedule of $10 billion reductions in stimulus at each of its eight FOMC meetings this year," says Omer Esiner at Commonwealth FX.

The pound sterling to US dollar exchange rate is trading 0.1 pct down on a day-to-day basis; GBP/USD is quoted at 1.6565 in late afternoon trade in London.

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The outlook for continued, steady reductions in Fed stimulus should keep the US dollar (USD) well supported, especially as other major central banks either stand pat or keep the door to further easing open.

Investors will look closely at the Fed’s statements for any clues that recent volatility in global markets could prompt a slowdown or a pause in the pace of stimulus reduction.

US FOMC meeting to dominate outlook for US dollar exchange rates

The big event on the horizon is the January FOMC meeting decision.

A further $10bn taper announcement is now generally expected from the FOMC, so is unlikely to be enough to trigger a significant reaction.

However, Lloyds reckon there will be more attention on any wording of the statement that gives some indication of the likely pace of tapering going forward, but we would not expect this first meeting of Yellen’s tenure to stray far from the expected path.

"Nevertheless, any indication that a faster pace of tapering is being considered should be USD positive, particularly against the higher yielders, while the opposite reaction can be expected on any more dovish signs. Against some lower yielders, notably the JPY, we would expect the opposite reaction with the equity response to yield expectations likely to dominate, and the JPY consequently tending to benefit from any hawkish Fed stance," say Lloyds.

Outlook for the pound to US dollar exchange rate

"Trend and momentum indicators remain in the bullish zone for a daily close above 1.6425. The bias is on the upside," says Ipek Ozkardeskaya at Swissquote Bank.

Analyst Gareth Berry at UBS gives a bullish forecast for the pound dollar exchange rate: "As bullish conditions persist, there’s further upside potential to resistance at 1.6747. A break above which would open the way to 1.7043. Support is at 1.6447 ahead of 1.6310."

Craig  Erlam at Alpari UK:

"Sterling is continuing to look bullish against the dollar, after finding significant support around the 50 fib level on Friday before gapping higher at the start of the week. Yesterday’s spinning top candle may have hinted at a bearish reversal today, however the early retracement was short-lived and the pair didn’t even come close to taking out yesterday’s lows.

"Instead it has continued to rally and looks likely to take out yesterday’s highs which would make any reversal very unlikely in the short-term. Once these highs are taken out, the next target will be 1.6667 followed by 1.6745, 28 April 211 high. If we do see a move to the downside, the first target will be yesterday”s lows, around 1.6535, followed by this week’s lows of 1.6473."