Weaker data and low inflation weigh on the Pound

US Dollar Research Report

Expectations of a rate rise in the UK fade

Weaker data and low inflation weigh on the Pound

All eyes on the Federal Reserve in October

Sterling Dollar GBPUSD FX Technical Analysis

It certainly was a rollercoaster ride for the Pound in September as it managed to trade as high as 1.5600 before losing significant ground towards the end of the month closing around the lows just above 1.5100 on an inert-bank basis.

Like most of the market Sterling has been driven by the monetary policy stance of the Central Bank. It had been widely expected that the Bank of England would raise interest rates from 0.5% by the end of this year. Governor Carney had intimated that although the move would , of course , be data dependant but that things would be "much clearer" by the end of the year. Subsequently UK data has been mixed with manufacturing and construction disappointing and the all-important service sector PMI coming in at its lowest level for 2 years. The index fell to a 27 month low of 55.6 in August , much nearer to the 50 level which indicates flat activity. Consumer Price inflation also fell back to zero I August from 0.1% in July below the BOE target for the last 20 months. Although this will be a welcome boost to consumer spending it will have done little to bolster the argument for higher interest rates hence the Pound has struggled to maintain any meaningful rally.

Talk of higher rates in the United States has also been at the forefront of traders' minds and the recent Federal Reserve meeting had been hotly anticipated. The talk beforehand was that the Fed may see through the current slowdown in China and unrest in the middle east and perhaps raise rates regardless. Unfortunately the Fed remained on hold although the decision was not unanimous with Jeffery Lacker casting a vote for an increase. They have certainly left the door open for a move at some point this year and the dollar is trading at multi year highs versus a basket of currencies. Fed Chair Yellen has said that rates may even move as soon as October , despite the fact that there is no press conference due next month.

Data releases will become even more important and Friday's Non-farm payrolls will be very closely watched. A strong figure could be the catalyst for further dollar strength.

For USD Buyers

Having broken through the trend line just above 1.5200 it looks like we could be testing the psychologically important 1.5000 level shortly. Momentum indicators are a little oversold however if we do see any bounces I would expect 1.5200 to exert a reasonable amount of resistance. A break below 1.5000 would suggest that we are back on our way towards the calendar year low around 1.4600.

For USD Sellers

It's looking quite good for dollar sellers at the moment. If you have not sold yet and have the time on your hands then a stop loos order above 1.5200 in the near term would be prudent hoping for a move below 1.5000.