GBP/EUR: Why did the Fed Matter to the Exchange Rate?
The British pound lost notable ground against the euro in the wake of the September interest rate decision at the US Federal Reserve.
The US Federal Reserve has indicated it is in no mood to raise interest rates from record lows - the decision has prompted a flurry of GBP selling with losses coming right across the G10 board.
Why would the pound fall against the euro on events happening across the Atlantic in the United States?
The answer lies with central bank decision making. Broadly speaking higher interest rates = higher currencies; the US dollar is the biggest loser as investors price in the first interest rate rise in the US only occuring in 2016.
The Bank of England historically follows the lead of the US Fed when embarking on an interest rate raising cycle and analysts are unanimous in their thinking that any delay to higher rates in the United States will translate to a delay in the United Kingdom.
As such the pound sterling is feeling the heat against the euro.
The British pound to euro exchange rate has declined back into the 1.36’s after breaching 1.37 in the mid-week session following some undeniably positive domestic events.
The GBPEUR will now likely test the 1.36 threshold over coming days with momentum indicators confirming the preferred direction is lower.
However, 1.36 is incredibly important to the outlook as it has provided significant buying support for the pound sterling over recent months and history would suggest the same could be true this time around.
Be aware though that recent events could just be the game-changer that breaks the camel's back.
Latest Pound/Euro Exchange Rates
  | Live: 1.1448▲ + 0.04%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1059 - 1.1105 |
**Independent Specialist | 1.1288 - 1.1334 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
"Yesterday’s Fed decision is a positive for cable. However, how likely is a BoE rate hike at the end of the year if the Fed backtracks on its hiking intensions? It will probably take same time for sterling to find its way in a context of a soft FED and a soft ECB," says Piet Lammens, analyst with KBC Markets in Brussels.
GBP/USD is pushing higher and has broken the resistance implied by the upper bound of the uptrend channel. Hourly resistance at 1.5509 (27/08/2015 high) has been broken and hourly support is given at 1.5330 (15/09/2015 low).
Stronger support is given at 1.5165 (04/09/2015 low). • In the longer term, the technical structure looks like a recovery bottom whose maximum upside potential is given by the strong resistance at 1.6189 (Fibo 61% entrancement).
The Fed Boosts the Euro
The Federal Reserve has cited increased deflationary pressures as one reason to hold back on raising rates. Another is the uncertainty creeping into the global economy.
Furthermore the central bank stated, "the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."
This is a vague piece of guidance and we see it as the firmest indication that the FOMC is looking to kick the ball into 2016.
“Janet Yellen and her Fed colleagues will have thought long and hard about this decision, but it’s no real surprise that they’re sticking with the status quo for now,” says Dennis de Jong, managing director at UFX.com.
The global economic picture is turbulent at present and an interest rate hike could have had serious ramifications, especially for some of the emerging economies.
“Rates will undoubtedly rise at some point in the next few months, but at this stage the Fed is treading carefully, which is a sensible strategy,” says de Jong.
The analyst points out that it’s been almost seven years since the last rate change and another couple of months isn’t going to do any harm.
