GBP and the FOMC policy statement

The US dollar appears well bid across the board except against the GBP as we head into the FOMC event. The GBP/USD pair has taken out key resistance at 1.5639 (38.2% of June rally) to trade above 1.5650.

The FOMC statement, due for release today, is not followed by Yellen’s press conference and is neither accompanied by the interest rate dot chart and revisions to the US GDP and inflation forecast. Consequently, it can very well turn out to be the non-event. However, there is a possibility of surprises – hawkish/dovish. In case the Fed is on track to raise the rates in September, the policy statement today is likely to carry a clear cut hint at September rate hike.

How Fed telegraphed QE taper in 2013?

If we look back at how the Fed telegraphed the QE taper, it is quite possible that the Fed statement today could carry a hint at rate hike (especially if plans to do in September). The taper talk begun in Jan 2013, gained pace in May-June 2013. Markets priced-in the first taper in September, but Fed stood pat, and actually announced the taper in December. Consequently, the markets had completely priced-in the taper by December and thus, we did not have a major risk aversion after first taper was initiated in December 2013.

So a rate hike in December..

On similar lines, the Fed could telegraph its rate hike, with the actual move happening in December. However, the policy statement today could talk up the possibility of a hike in September. Moreover, the rate hike talk has not resulted in a kind of turmoil that taper talk had triggered in EM markets in Q3 2013. However, the rate hike talks have pushed up the USD index, which is hurting the US economy. Back in Q3 2013, it was ADXY that had strengthened significantly. Hence, the most likely outcome of the Fed policy today could be a hint at September rate hike accompanied by the strong concern regarding the strength in the USD index.

Fed is widely expected to comment on

• Concerns regarding China and falling commodity prices

• Domestic inflation still well below target, hurt by strong USD and weak energy prices

• Cheer the fact that the Greek crisis is out of the way (at least in the short-run)

• Sound upbeat regarding labor market strength

A hawkish surprise would be

• Hint at rate hike September

• Plays down the negative impact of Chinese turmoil

A dovish surprise would be

• Direct comments on the negative impact of strength in the USD and reiterates lift-off is data dependent

A hawkish surprise would obviously be bearish for the GBP/USD pair. However, the rate hike hint from the Fed would mean the BOE is next in the line. Hence, GBP could strengthen rapidly against the Euro and commodity currencies.

The GBP/USD could also weaken in case the Fed hints at a rate hike, but sounds worried about USD strength. Once again, in this case, the GBP appears more attractive low yielding European currencies as well as commodity currencies. GBP/JPY could take out 194.37 (July 17 high), and rise towards 195.87 (June 24 high).

Meanwhile, a dovish surprise would push the GBP/USD higher, especially since the spot is trading above 1.5639 (38.2% Fib of June rally).

GBP/USD – Daily chart

• The spot currently trades above 1.5639 (38.2% Fib R of June rally), a level which the pair has failed repeatedly failed to take out on the daily closing basis since July 1.

• A break above 1.5675 (July 15 high) could open doors for 1.5750 (23.6% of June rally). A dovish statement could see the pair rise closer to 1.5750 in the overnight trade.

• A failure to take out 1.5639 on the daily closing basis could lead to a fresh sell-off to 1.5460 (61.8% of June rally)-1.5402 (200-DMA).