Pound / Dollar Outlook: Faster Fed Taper Puts 1.3170 in Pipeline

• GBP/USD nearing 1.3300, setting new 2021 lows
• As USD lifted by prospect of faster Fed policy shift
• San Francisco Fed latest to mull a faster QE taper
• After inflation rises at accelerated pace in October
• Charts suggest scope for GBP/USD fall to 1.3170

Above: File image. San Francisco Federal Reserve President Mary Daly. Impact source: Commonwealth Club of California.

The Pound to Dollar rate was closing in on the round number of 1.33 in the mid-week session and setting new lows for 2021 along the way, although the mounting prospect of a faster pace of Federal Reserve (Fed) policy change could potentially see it falling as far as 1.3170 in the weeks ahead.

Pound Sterling came under further pressure from a rising Dollar on Wednesday as the greenback advanced almost across the board in price action that appeared to be incited by a collection of data released in the U.S. as well as the latest insights from the Federal Reserve.

“If things continue to do what they've been doing, then I would completely support an accelerated pace of tapering,” Federal Reserve Bank of San Francisco President Mary Daly told Yahoo Finance in an interview that was published on Wednesday.

"But I have a couple of data points in front of me and also the deliberations with my colleagues to really think about this,” Daly added.

San Francisco Fed President Mary Daly became the latest U.S. rate setter on Wednesday to suggest that the Fed may eventually be persuaded to wind down the Fed’s $120BN per month quantitative easing programme at a faster pace, which could have knock-on implications for U.S. interest rates.

Above: Pound-Dollar rate shown at daily intervals alongside U.S. Dollar Index.

• GBP/USD reference rates at publication:
  Spot: 1.3330
• High street bank rates (indicative band): 1.2963-1.3057
• Payment specialist rates (indicative band): 1.3210-1.3263
• Find out about specialist rates, here
• Or, set up an exchange rate alert, here

President Daly’s comments are potentially all the more significant because of the market’s perception that she is a ’dove’ and so somebody who might typically be less likely to support actions that could be characterised as a tightening of monetary policy.

The statements and possible change of position come after official data revealed on November 10 that inflation rose at an accelerated pace of more than six percent during October, making for the strongest price growth in the U.S. since 1990.

That trend was confirmed on Wednesday by the Fed’s favourite measure of inflation pressures, the core personal consumption expenditures price index, which rose from 3.7% to 4.1% for the 12 months to the end of October even after alcohol, food and energy prices were excluded from the data.

“Economic indicators so far point to a stronger Q4 GDP while the labour market seems tighter than forecast and inflation is running hotter than the September SEP suggested. The trade-weighted dollar has the 97 big figure within reach,” says Mattias Van der Jeugt, head of research at KBC Markets.

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The Fed had set out just days before the November 10 data were released its plan to begin winding down the bank’s bond buying stimulus programme by reducing purchases of government and mortgage bonds in increments of $15BN per month. From some $120BN per month in November.

That process would have seen the Fed ending its purchases around the middle of next year although even before Wednesday three members of the Fed’s board of governors had suggested that they might soon become willing to taper off the quantitative easing programme at a faster pace.

“We can certainly see a less favourable USD story forming at some point in 2022H1; labour supply will surely respond when excess savings are worked off, global supply bottlenecks start to ease (shipping rates are falling now and used vehicle prices are cresting) and base effects turn, dragging annual inflation rates substantially lower. But, markets won’t have any of that now,” says Richard Franulovich, head of FX strategy at Westpac.

The trend in U.S. inflation and prospect of a response to it from the Federal Reserve has given a five-month rally by the greenback a new lease of life and put the Pound-Dollar rate under continuing pressure, prompting some technical analysts to grow more confident about forecasts that it could fall as low as 1.3170 in the days and weeks ahead.

Above: Pound-Dollar rate shown at weekly intervals with major moving-averages and Fibonacci retracements of 2020 recovery indicating likely areas of technical support.

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“Beyond a minor bounce, the cross is likely to remain under pressure and on course for the 200-week ma at 1.3159. Interim resistance lies at 1.3514, last week’s high,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, referring to GBP/USD.

Fed Chairman Jerome Powell had suggested in November’s monetary policy press conference that members of the Federal Open Market Committee of rate setters felt they could afford to wait until the second and third quarter of 2022 before even contemplating an uplift in the Federal Funds interest rate, which has been set at between 0% and 0.25% since soon after the onset of the pandemic.

But he and other policymakers had also previously said they’d been expecting the uptrend in inflation to moderate and for changes in price growth to begin easing next year, however, and with data asking questions over whether this will happen the financial markets have moved to price-in a rise in U.S. interest rates that comes sooner than many had previously envisaged in what has been a boon for the U.S. Dollar.

“We thus look for a sustained break below the 1.3352/50 recent lows to clear the way for a fall to support next at 1.3277, ahead of what remains our core objective of 1.3189/35, which is the major cluster of supports including the 38.2% retracement of the 2020/21 rise and December 2020 lows. We continue to look for an important floor here,” says David Sneddon, head of technical analysis at Credit Suisse, in a Wednesday note to clients.