Figure 1 and figure 2 below show current market expectations for the Dec 2015 Fed Funds rate and the 6-month Sonia rate (a good proxy for UK rate expectations), respectively. Right now there is only a month in it, with the market expecting the first hike from the Fed in December, and the BOE only a month behind with its first hike expected in January 2016.
Figure 1:
Source: City Index, Data: Bloomberg
Figure 2:
Source: City Index, Data: Bloomberg
Don’t bank on the Fed moving first…
When expectations are this close, any shift in tone from the Fed at this week’s meeting could have major implications for interest rate expectations and, in turn, for the FX market. Figure 3 shows the 2-year US and UK government bond yield spread, which is also considered a good way to detect relative market expectations for the UK and the US. As you can see, US yields are higher than UK yields, however, the UK-US yield spread has recovered and is only -6 basis points, after falling to as low as -20 basis points in June. Thus, if the Fed sticks to a neutral to dovish tone in its post-meeting statement on Wednesday then we could see US yields fall causing this spread to recover, and maybe move back into positive territory. As you can see, the spread moves closely with the GBPUSD rate, so if the spread recovers then we could see GBPUSD gain some traction to the upside.
From a technical perspective, a dovish or neutral Fed statement that might confirm that a September hike is off the cards could trigger some GBPUSD strength. Key resistance lies at: 1.5684 – the high from 15th July, then 1.5881 – the 50% retracement of the July 2014 peak to the April 2015 low.
Figure 3:
Source: City Index, Data: Bloomberg
Takeaway:
- The Fed and the BOE are expected to hike interest rates one month apart in Dec and then Jan, respectively.
- There are a few in the market expecting a September rate hike from the Fed, so any sign that a Sept hike is unlikely in the statement from this week’s Fed meeting, could be perceived as dovish and thus dollar negative.
- When rate expectations are so close, the smallest shift in tone or economic data could trigger a big reaction in the GBPUSD rate.
- After the solid Q2 UK GDP report, it is worth watching the US GDP report, released Thursday. Any weakness could trigger a GBPUSD recovery later this week.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
AUD/USD holds above 0.6500 in thin trading
The Australian Dollar managed to recover ground against its American rival after AUD/USD fell to 0.6484. The upbeat tone of Wall Street underpinned the Aussie despite broad US Dollar strength and tepid Australian data.
EUR/USD comfortable below 1.0800 lower lows at sight
The EUR/USD pair lost ground on Thursday and settled near a fresh March low of 1.0774. Strong US data and hawkish Fed speakers comments lead the way ahead of the release of the US PCE Price Index on Friday.
Gold pulls away from daily highs, holds above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays near 4.2% after upbeat US data and makes it difficult for XAU/USD to gather further bullish momentum.
Google starts indexing Bitcoin addresses
Bitcoin address data is live on Google search results after users realized on Thursday that the tech giant started indexing Bitcoin blockchain data. However, mixed reactions have followed the tech giant's reversed stance on the cryptocurrency.
A Hollywood ending for fourth quarter GDP
The latest revisions put Q4 GDP at 3.4%, the second fastest quarterly growth rate in two years. Much of the upside was attributable to stronger consumer spending, yet fresh profits data affirmed it was a good quarter for the bottom line as well with profits up by the most since the Q2-2022.