GBP/USD: GBP Defends 1.42 Following UK GDP + US Fed Statement
Decent economic growth numbers out of the UK and a dovish tone to the US Federal Reserve's FOMC statement saw the pound cement its newfound base against the US dollar.
Th GBP to USD conversion appears intent on defending a baseline at 1.42; the exchange rate has only closed below this level once this month.
This tells us that we could be witnessing a temporary base formation which could arrest further weakness. That said, there are those who see any stabilisation in the GBPUSD as a chance to press the sell button once more.
The dollar traded mixed following the release of the FOMC rate decision on the 27th of January, as although there was no change in policy, the statement was interpreted as marginally dovish, which was very much in line with the market’s new view of the levelling trajectory for Fed tightening in 2016.
The pound to dollar rate closed Thursday at 1.4356, higher than Wednesday's 1.4246.
The British pound was bid higher after it was reported that UK annual growth was confirmed at 1.9% in January, quarterly growth was seen at 0.5%.
Services output growth accelerated to 0.7% qoq (contributing 0.52pp to GDP growth), up from 0.6% qoq growth in the previous quarter.
Industrial production fell 0.2% qoq (contributing -0.03pp to GDP growth). Construction output contracted 0.1% (contributing -0.01pp from GDP growth). Within industrial production, manufacturing growth was flat following a fall of 0.4% qoq in 3Q15.
"In the near term, UK economic growth is likely to remain close to but below its trend amid the fiscal squeeze, subdued global growth, heightened stock market volatility and the impending referendum on EU membership," says Daniel Vernazza, UK economist at UniCredit Bank in London.
UniCredit say the data is not enough to prompt the Bank of England into an interest rate rise until the end of this year as one of Mark Carney’s three pre-conditions for a rise in interest rates – the renewal of above-trend growth – is unlikely to be met.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3344▲ + 0.13%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.289 - 1.2943 |
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* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Global Factors Dominate Fed Concerns, but USD to be Supported
Ahead of the UK growth numbers we saw sterling hold ground in the wake of the US Fed's January statement which concentrated on the global outlook as an influential factor in decision making.
The addition of the sentence that the Fed would be “closely monitoring global economic financial developments,” was viewed by some market participants as increasing the likelihood the Fed might leave the rate unchanged if global market turmoil resumed – a risk which is being viewed as quite high.
"The FOMC is in watch and wait mode regarding China’s outlook but the door remains open for another hike as soon as March. The snow is already melting and US data flow should also warm up in the weeks ahead, supporting USD," says a note from the currency team at Westpac in Australia.
The Financial Times commented that the Fed had given a signal it would keep rates on hold whilst it assessed the changing global economic climate:
“The central bank said it was assessing what the gyrations around the world meant for the risks facing the US economy, leaving its options open.”
It further added:
“The global picture has darkened markedly since Fed policymakers last met in December.
“The statement suggested the Fed does not want to rush to judgment about the implications of the market gyrations.”
It further added that it would be “assessing global developments” for its “balance of risk view.”
The Fed removed the sentence where it said the risks to outlook “are balanced” - again an omission viewed as a dovish.
New Members Not So Hawkish
The detail that the vote to keep rates unchanged was “unanimous”, dispeled to some extent, the assumption that the rotation of voting within the Fed at the beginning of 2016 had resulted in a more hawkish group of voting members.
Inflation and Growth Downgraded
Nevertheless, on the more hawkish side, the statement retained the phrase about the effects of energy deflation due to fall in oil and the deflationary effect of the strong dollar as “transitory”.
The Fed also continued to expect inflation to rise in the medium term, another hawkish view.
The statement said the labour market improved even as the economy slowed in Q4, however, more dovishness shone through in the replacement of “moderate” growth with “slowed”; and the statement completely removed the hawkish phrase that the Fed was“reasonably confident” that inflation will rise.
Treasury Yields Rose, US Dollar Supported
Remarkably given the dovish twist to the statement U.S Treasury yields rose on the back of the news (normally indicating a higher chance of a rate hike), with 2-year Treasury’s, which are seen as a barometer for Interest rate policy, actually rising by 0.0265% to 0.867% following the release.
The dollar also gained ground versus the yen and the pound, although it lost ground to the euro.
But as mentioned, the British pound is still defending ground above the 1.42 level, (aided no-doubt by strong GDP figures for the fourth quarter) and we expect near-term action to be maintained.
According to technical analysts at Swiss Quote the short-term rebound may extend higher, after breaking out of the descending channel the pair has been in for weeks:
"GBP/USD has exited the downtrend channel.
"The long-term technical pattern is negative and favours a further decline towards the key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64.
"However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound."
Commerzbank, meanwhile, argue that the pair has not fully broken above the down-trend line:
"GBP/USD reversed last week from 1.4083 and is trying to break through its two month downtrend at 1.4308 which caps for now.
"In order to alleviate downside pressure, a close above here and the recent high at 1.4366 will be needed.
"This looks increasingly likely and we will tighten stops on our short positions and exit on minor dips to 1.4250."
