The GBP to USD conversion has edged back above 1.30 in the hours following the US Federal Reserve Open Market Committee's decision to leave interest rates unchanged at their September meeting.
The US Federal Reserve didn't surprise anyone by opting to not cut interest rates at their September 21st meeting.
Yet, there were enough changes in the Fed's communication to prompt the GBP/USD to recover som of the ground it has lost over recent days as we see it at 1.3072 at the time of writing confirming that there is some element of technical support for the UK unit just below 1.30.
Despite Sterling perking up somewhat, the outlook for the British Pound has not materially changed.
Societe Generale’s FX strategist, Kit Juckes, believes that even though the Fed did not act on interest rates it has done enough on communicating a cut in December to ensure GBP/USD falls lower.
Juckes notes that the Pound remains sensitive to short-term rate differentials and, "my bearish bias is intact against both USD and EUR."
Hantec Markets' Richard Perry is also bearish GBP/USD, saying, “the techncials continue to suggest that rallies should still be seen as a chance to sell within the medium term range.”
Perry adds a move down into the 1.27s should not be ruled out:
"The technicals suggest that continued weakness below $1.3060 would open $1.2863 and the key range low at $1.2796.”
The Fed - The Message is in the Dots
The bottom line is that a US Fed rate rise is coming - and this should ultimately support the Dollar going forward.
However, the pace of expected rate hikes is not as severe as previously thought.
This is why we are seeing the USD falling elsewhere.
The pace of rate changes can best be communicated via the dot plot graph released by the Fed. This shows where each member of the FOMC believes interest rates should be at a given point of time:
The difference between the September meeting and the June meeting is that members are now a little less hawkish on future rate rises.
This saw some unwinding in exposure to the USD.
In her press conference Fed Chair Yellen explicitly addressed the question why they did not raise rates at this meeting.
Her conclusion was that it was because they want to be cautious.
"That she raised the issue is another indication of an intention to send a relatively ‘hawkish’ signal," says a note from Lloyds Bank Commerical Banking.
The proximity of the next FOMC on 2nd November to the Presidential Election (8th November) makes an interest rate rise unlikely at that point, although the relatively ‘hawkish’ tone of the statement means that it cannot be ruled out.
"If US economic data pick up over the next few weeks, the FOMC is likely to use its November press statement as an opportunity to send an even stronger signal that it will raise rates in December," say Lloyds.
With an interest rate rise highly likely in December we would imagine losses in USD should be contained.
As such, the GBP/USD should remain heavy.