Slump in GBP/USD Exchange Rate Continues: A Fall Down to 1.55 Now Expected

The late October relief-rally seen in the pound dollar exchange rate (GBP/USD) has come to a screeching halt following the release of the minutes from the October meeting of the US Federal Reserve.

The US dollar powered higher after it was shown the US Fed was confident that the US economy's rate of growth was on track, laying out the all-clear for the Fed to raise interest rates in 2015.

The collapse in confidence in the sterling dollar rebound has ignited warnings that yet further declines should now be expected.

The below graph captures the pound to dollar exchange rate's sudden fall from grace in the moments following the release:

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What the US Fed Did to the Sterling Dollar Pair

The US dollar has surged higher against the pound sterling after it was shown that the US central bank is on course to raise rates in mid 2015.

This contrasts to expectations concerning the Bank of England whose decision makers have been stressing the need to keep interest rates as low as possible for as long as possible - this has driven a wedge between the pound and dollar.

What can we take away from today's Fed statement? In summary the Federal Reserve 1) Ends Quantitative Easing 2) Upgrades labour market forecasts 3) Only one member, Kocherlakota, dissents 4) Does not lower its inflation assessment which markets had been expecting.

"Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing," says the part of the statement that really boosted USD sentiment.

Where will GBP/USD Go Next?

According to Luc Luyet at Swissquote Bank it's all downhill for the GBP/USD from here:

"GBP/USD has successfully tested the resistance at 1.6184 and has broken the support at 1.5995. A decline towards the key
support at 1.5877 is likely.

"Hourly resistances can be found at 1.6018 and 1.6072.

"In the longer term, given the significant deterioration of the technical structure since July, the strong resistance area between 1.6525 and 1.6644 is expected to cap any upside in the coming months. Monitor the current consolidation phase near the strong support at 1.5855."

Why the Bank of England is Not Helping Sterling

Despite the first estimate of Q3 GDP coming in at a decent 0.7% q/q, recent rhetoric from a number of BoE officials have been a little on the dovish side.

BoE MPC members Shafik, Cunliffe and Haldane have all indicated that monetary policy could remain loose for longer than previously thought.

"While this may be a little dovish, the comments do somewhat support current market rate expectations. The OIS curve suggests the first rate hike is priced for around August 2015," say Lloyds Bank Research in a note to clients.

If we take what the Fed is saying and compare it to what the BoE is saying we see a divergence in intent. It is this divergence that is driving a wedge between the two currencies and will likely keep the pound to dollar exchange rate under pressure unless we see some materially improved UK data readings.

Ahead of the Fed: Why the US Dollar Had Fallen Against the Pound Sterling

Ahead of the Fed release it was the US dollar that was on the backfoot with data from the United States disappointing to the downside.

This convinced markets that the timing of interest rate rises by the US central bank will be pushed deeper into 2015.

It was expectations that the timing of the rate rise would be brought forward that stimulated much of the impressive 2014 USD rally.

Falls came on the release of Core and comprehensive Durable Goods Orders for September.

On the Core side, we saw a retraction of 0.2% against a forecasted increase of 0.5%, with the comprehensive number coming in at a decline of 1.3% against a predicted rise of 0.4%.

The big story on the North American side is that the U.S. Conference Board Consumer Confidence Index came in at 94.5 versus an estimate of 87.4, demarking the largest value for that figure in seven years.

"A Fed rate hike seemingly moved further from sight after durable goods disappointed, falling a second straight month. The weak reading played up downside risks to growth from weakness abroad, fanning greater uncertainty over the outcome of this week’s Fed meeting," notes Joe Manimbo at Western Union.

The Pound Sterling Suffers Fragile Sentiment

On the sterling side of the equation all is quiet and GBP/USD is being driven by the USD and will continue to do so for the remainder of October.

Nevertheless, underlying sentiment appears fragile for the U.K. currency, particularly after an area central bank official said that low inflation pressures stood in the way of an eventual rate hike.

"The pound has been undermined by low inflation which hit five-year lows of 1.2 percent in September, showing prices far south of the Bank of England’s 2 percent goal. But the economy’s generally half full appearance has helped stem downside risks. Data last week showed Britain grew a solid 0.7 percent in the third quarter which is expected to easily exceed the euro zone’s rate of growth for the same quarter," says Manimbo.

The pound could catch a pop Wednesday if the Fed should reinforce its dovish stance and reaffirm that a U.S. rate hike was still a “considerable time” away.