GBP/USD Exchange Rate Rockets to 2015 Best Following Fed Decision
A dovish US Federal Reserve has opened the path to the best pound to dollar exchange rate conversion of 2015.
As widely expected the FOMC upgraded their assessment of the economy in its June statement but trimmed growth forecasts and signalled a shallower 2016 path for interest rate rises, something the market read as slightly dovish.
The GBP-USD rose over 1.1pct following the event to reach 1.5822, the highest level of 2015.
The pound sterling already held the advantage ahead of the FOMC as strong data UK wage figures and supportive Bank of England MPC minutes weighed in favour of GBP.
"We have been impressed by the latest rally in the British pound. Seven trading days have now past without a down day for GBP/USD. While part of the strength can be attributed to FOMC uncertainty, sterling's outperformance versus other major currencies tell us that the move is primarily driven by demand for the U.K.'s currency," notes Kathy Lien at BK Asset Management.
Studies show that sterling holds the advantage against the Greenback heading into the meeting with the pair trading above the 20, 50 and 100 day moving averages, a configuration that advocates for further gains:
Furthermore, the RSI is positive but not yet in overbought territory, support is seen at 1.5530 – a level that could arrest any weakness.
Those looking to capitalise on higher rates should contact an independent dealer immediately and set a buy order for higher rates. Doing so will also see you transacting at tighter spread from the market rate than your bank would offer. Tighter exchange rates on international payments can see up to 5% more currency being delivered in some cases. Learn more.
The Fed Has Spoken
The median Fed Funds rate for end-2015 was unchanged at 0.625%, implying two hikes and a probable September 17 lift-off date.
"However, that disguises a clearly more dovish bias to the distribution of forecasts around the median," points out Westpac's Richard Franulovich.
For example, there are now five members among the seventeen projecting a Fed Funds rate of 0.375% this year (i.e. just one hike) whereas back to in March just one member thought the Fed would hike just once this year.
The implied pace of policy firming in 2016 has moderated slightly too, the median now at 1.625%, down from 1.875%. implying four Fed hikes in 2016, down from five as of their March meeting.
By end-2017 the median Fed Funds is seen at 2.875% vs 3.125% in March.
"Divining true meaning from the dot-plot remains difficult though since some dot-plotters - Chair Yellen, Fischer and Dudley - in reality carry more weight than others and Chair Yellen continues to warn against reading too much into these projections," notes Franulovich.
USD Will Climb Longer-Term
It is important that those watching the currency markets do not lose sight of the bigger picture. Despite the weakness in the USD post-FOMC the outlook for the US economy remains very favourable.
As such the basis for a stronger USD over the course of the coming year remains intact. We wrote back in April that BMO Capital are seeing the next stage of the long-term USD rally only occuring in September - this view is looking increasingly spot on.
"In an environment where the RBA, RBNZ and ECB are either easing or talking about doing so, the dollar will remain attractive. Therefore we have used the latest pullback as an opportunity to reload some of our long dollar positions because the long dollar trade is not dead," says Kathy Lien from BK Asset Management. .
Our Pre-Fed Analysis: What to Watch
As mentioned, economic forecasts and sentiment are what will matter for the USD in the June FOMC meeting.
“At the onset, the dollar could slip on the back of lower economic projections but once Janet Yellen speaks and prepares the market for liftoff, the dollar could see upward momentum. With 72% of economists surveyed by the Wall Street Journal anticipating a rate rise in September we know that the market is looking for confirmation of what is quickly becoming a popular view,” says Lien.
The Fed has made it clear that a rate hike will only come onto the agenda when the labour market further improves and it is “reasonably confident” that inflation will rise to 2% in the medium term.
The labour market recovery is intact, as is shown not only by the employment data but also by other indices to which Yellen has referred. The number of job openings is at its highest level since 2001 and an increasing number of employees are quitting amid better job.
Against this backdrop, the pressure on companies to offer higher wages will increase.
After quite a few years of modest wage growth, wage pressure is now evidently rising - this is a key ingredient for higher inflation rates in the medium term.
If this trend continues, there will be nothing in the way of a rate hike at the September meeting.
GBP-USD Could Continue Current Trends
Price action in the sterling dollar exchange rate would however suggest that a September rate hike is already priced into the exchange rate.
Indeed, one would have expected a stronger USD with such solid expectations for a September interest rate rise.
According to a recent note on the matter published by Bank of America Merrill Lynch Global Research, the dollar’s inability to rally sustainably despite building evidence for a September rate hike suggests:
(1) investors remain uncertain about the strength of US growth (and how the Fed will respond),
(2) positioning is still long USD, and
(3) external factors like the moves in German sovereign debt and the situation in Greece are dominating improving US fundamentals.
Together this suggests the USD could continue to consolidate near current levels and should the UK deliver some strong data points the GBP-USD could continue its recent trend.
Those with currency requirements should ensure their FX provider has the relevant buy orders in place in the event of a spike higher and a stop-loss order ready should the rate plummet.
