Pound / Dollar Targets Best Exchange Rate of September

The pound to dollar exchange rate (GBPUSD) has powered to a September best following news that the US Federal Reserve has opted to avoid raising interest rates.

The pound to dollar exchange rate shot higher in the wake of the US Federal Reserve's decision not to raise interest rates. GBPUSD spiked to its highest levels since August having hit a maximum of 1.5628.

The Fed cited deflationary pressures as being one reason to keep rates unchanged while taking a more pessimistic view on growth and the achievement of their inflation target. 

Many analysts are now only expecting a 2016 interest rate hike.

What does the outlook for GBPUSD look like in the wake of recent events?

"While the USD is at risk of follow through selling in the near term, there is little reason to believe we should move out of recent ranges. This should see volatility reduce and while the natural reaction is to move to carry trades in such periods, the higher yielding currencies are still susceptible to risks around China," say Lloyds Bank Research in a note to clients.

After strong wage data earlier in the week, "the GBP should benefit from the FOMC remaining on hold in the short term which can see GBPUSD grind up towards the 1.5750-1.5900 range highs, while we expect EURGBP to gradually shift back towards .7250/00 range lows," confirms the UK bank.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3337▲ + 0.08% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.2884 - 1.2937
**Independent Specialist	1.315 - 1.3204 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

As noted below, carry through on the back of this new-found momentum could allow a run to 1.58 to occur.

Earlier: How to Play the Fed - Did BMO Get it Right?

From a currency perspective there are four broad scenarios that traders, and those with large currency transfers, would have positioned for.

Each scenario could have a different impact on the pound to dollar exchange rate (GBPUSD) - the range of outcomes varies with 1.53 being the minimum and 1.58 being the maximum.

“We are sticking with our house call of a rate hike, although we expect it to be about the most dovish hike that the Fed can engineer,” says Greg Anderson, Global Head of FX Strategy at BMO.

The Four Scenarios

(click to enlarge).

As we can see the outcome with the highest probability attached, in the opinion of BMO Capital, is the ‘Dovish hike’ scenario.

What does this entail?

“This scenario seems like an oxymoron, but it’s what we think is most likely. A dovish hike could be accomplished in a number of ways. One might be to shift the Fed’s target range by 25bps, but express satisfaction if the overnight fed funds rate only rises to the bottom of the new range at 0.25%,” says Anderson.

Another way to dovishly hike would be to hike by 25bps but rein in the median rate hike projection in the 2016 dots from 4ish hikes to 2ish hikes.

Yet another way to dovishly hike would be to hike but state that future hikes depend on inflation rising to the 2.0% target.

“We think the dovish hike scenario will be most negative for JPY due to its interest rate sensitivity and its safe haven status. We think equities and commodities would rally under this scenario, which would reduce the impact of the rate hike on currencies like MXN and CAD. With its risk appetite sensitivity, we think MXN would perform best,” says Anderson.

As can be seen, such a scenario is mildly bearish for the pound to dollar exchange rate and declines from currency spot levels at 1.55 is possible.

Another likely scenario is that the Fed leaves rates unchanged but communicates that rises are coming. The money markets have factored this scenario as being the most likely.

“This scenario probably doesn’t need much of a description, but we would characterise it as one where the Fed doesn’t raise rates but it also doesn’t rein in the dots much. Another way to make a hold seem hawkish to markets would be to announce a press conference for the October meeting,” notes Anderson.

This scenario is a slight relief for the moment, so it should push 3M and 2Y USD-denominated interest rates a few bps lower.

“Such a move in interest rate differentials would dent the USD slightly overall. We think this scenario is mildly negative for MXN and most positive for JPY because it leaves markets with the uncertainty of when the Fed will hike and what the impact will be. Markets don’t like uncertainty, so we think they will respond in a moderately risk-off fashion,” says the analyst.

Those wanting a higher GBPUSD exchange rate will be hoping for the final possibility - a Dovish hold scenario.

This would ultimately see the US Federal Reserve kick the first rate hike, and subsequent rises, deeper into 2016.

“The additional factors that would make a hold seem dovish are removing the likelihood of a 2015 hike from the dots and remarks in the press conference that tie the first hike to the 2.0% inflation target being achieved. That scenario screams risk-on for the moment,” says Gallo.

If this is the case then the door to GBPUSD at 1.80 is opened.