GBP/USD Rate Falls Again: USD Rallies But is Unable to Register Another Week of Gains
- Written by: Will Peters
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The British pound (GBP) has failed to find meaningful relief against the US dollar even as the US Federal Reserve indicates it is not looking to bring forward its interest rate rises.
There was initial selling pressure on the USD following the release of the minutes of the September 16-17 FOMC meeting. We warned earlier this week that this event could well call an end to the recent dollar rally and it looks like the GBP/USD is set to close this week off higher than it closed the previous week.
"The FOMC Minutes were perhaps on the dovish side of expectations. The Fed showed some concern that a further appreciation of the USD posed downside risks to exports and US growth, and could slow the gradual rise in inflation toward the 2% target. This subsequently prompted broad USD declines," say Lloyds Bank Research.
Dollar Exchange Rates Today:
- The British pound to US dollar exchange rate (GBP/USD) conversion is 0.48 pct lower. 1 GBP = 1.6041 USD.
- The euro to dollar exchange rate (EUR/USD) conversion is 0.43 pct lower, 1 EUR = 1.2635 USD.
- The US dollar to Canadian dollar exchange rate (USD/CAD) conversion is 0.08 pct lower, 1 USD = 1.1178 CAD.
Beware: The above are spot market quotes, your bank will affix a discretionary spread to the figures. Note that an independent FX provider is able to provide up to 5% more currency in some cases by getting closer to the market, learn how.
No Dollar Knock-Out
Despite the bearish Fed, the dollar has kept its chin up, why?
The answer lies with economic data. Weekly jobless claims fared better than expected, coming in at 287,000 compared to forecasts of 294,000. Moreover, the more reliable 4-week average fell to 8-year lows inside of 290,000.
The message can't be clearer - strong data will support the dollar - the relationship between the currency and economic data has tightened.
Reactions to the Fed Minutes
- Lloyds Bank Research:
"The case remains; monetary policy outlook is still data dependent. We suspect the USD may remain on the back foot today
"However, we would not expect a significant reversal of the recent USD uptrend; US data remains firm and the recovery is still progressing, so we would not expect the USD weakness to extend."
- Mark McCormick at Credit Agricole says the USD pullback has further to run:
"The overall tone emphasised the “data dependent” nature of the policy outlook, which to us suggests more scope for the short squeeze in forex markets to persist.
"Relative to short-term 'cyclical' fundamentals the USD remains dear. Indeed, the residuals from our regression model suggest that the Bloomberg Dollar Index (BBDXY) is still one standard rich to fair value – based on the S&P 500, the VIX, commodity prices and the 2-year yield.
"Given the US data calendar is light until mid-October we think pullback in the USD has further room to run. Our estimates suggest the USD is about 3% overvalued but again we look to buy the USD on dips."
The Build up to the FOMC Minutes - What the Currency Specialists Said
Paul Niven, Head of Multi-Asset Investment at F&C Investments says:
"The US Federal Reserve is likely to remove the ‘considerable time’ phrase from their upcoming monetary policy statement, indicating that a rate rise is coming onto the horizon, at the same time that the tapering process of its quantitative easing (QE) programme comes to an end."
Perhaps, should the reference be used, and thus the timeframe does not appear to have shortened, then the dollar would sell-off.
- Goldman Sachs tell us:
We expect that both the "considerable time" forward guidance and the assessment of "significant underutilization" in the labor market were likely topics of debate at the September meeting.
"At the event, both were retained in the FOMC statement.
"In addition, in light of the apparent about-face in the Committee's assessment of inflation—made more hawkish at the July meeting and downgraded at the September meeting—we will look for any further detail on participants' views.
"Further extensive detail on the exit strategy appears unlikely, in light of the release of updated exit strategy principles that were very much in-line with the discussion in the June and July minutes."
- Credit Suisse say:
"The FOMC minutes from the September meeting will provide insights into the decisions to retain the “considerable time” language and to release an exit strategy.
"We can imagine that some participants advocated a stronger emphasis on data-dependence. While we remain fundamentally bullish on the USD, we think USD longs could see further consolidation as the market waits for the 29 October FOMC."
- RBS say:
"The FOMC minutes from the 16-17 September meeting are released tonight. Of greatest interest will be discussion over the language in the statement, particularly the "considerable time" and "significant underutilization of labour resources" phrases, and any insights concerning the Fed's preferred timeframe for a possible language change.
"Overall the minutes should broadly reflect what we learned from the new September forecasts – that most members became more optimistic on achieving the Fed's mandates faster, which may tends to support the USD."
- Morgan Stanley say:
"Whether or not the dollar can hold onto its gains remains to be seen. The weekly close will be important as failure to close above 86.74 will see an end to what has been an incredible 12 consecutive weeks of higher closes. Its longest winning streak since President Nixon allowed the dollar to float in 1971.
"Todays’s FOMC minutes will thus be important. Should the minutes come in more dovish than the market is expecting, after the move higher in the released dots, then we could see further USD correction.
"Should the minutes come in more dovish than the market is expecting, after the move higher in the released dots, then we could see further USD correction."
