Pound and Dollar Both in Demand, GBP/USD Sees Strong Resistance Ahead Following Fed Minutes
Pound sterling is moving sharply higher against a raft of currencies however the dollar is in demand too, ensuring the potential for a stalemate in GBP/USD to emerge.
The US dollar appreciated sharply on the release of the minutes of the latest Fed meeting, more than recovering its decline following the FOMC on 27 April.
The rally comes as after the Fed made it known that a rate hike in the summer (15 June or 27 July) is the Committee’s baseline scenario, and will be implemented (if allowed by data) even if market probabilities are “unjustifiedly” low: implied fed funds rates effectively point to a single hike this year.
The key comment in the Minutes is this:
“Most participants judge that if incoming data is consistent with growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June."
The variables which will be monitored to decide the timing of the next hike are strictly domestic: growth, inflation and the labour market.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3345▲ + 0.14%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2891 - 1.2944 |
**Independent Specialist | 1.3158 - 1.3211 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
If signals are sufficiently favourable already next month, the move could therefore come in June - a move markets were not expecting.
Treasury yields soared following the release and in a matter of hours Fed fund futures went from pricing in a 4% chance of tightening in June to more than 30%.
At the start of the week bets were seen below 5%.
“These are very clear indications, which fully justify the dollar’s upside response, and will make it very reactive to US data flows. The most important event will undoubtedly be the publishing of the Employment Report on 3 June, although considerable input will become available before then, with GDP data at the fore on 27 May (second estimate of 1Q GDP) and the ISM on 1st June,” says Asmara Jamaleh at Intesa Sanpaolo in Milan.
Both the Dollar and Pound Sterling Can't Rally Against Each Other
The US dollar basket - which gives an overview of all the main USD pairs - rose notably in the wake of the data largely thanks to the rally in the USD/JPY and the decline in the EUR/USD.
Sterling, on the other hand, dropped only marginally on the FOMC minutes, and most importantly it had appreciated sharply in the course of the day against both the dollar (from GBP/USD 1.44 to 1.46) and against the euro (from EUR/GBP 0.78 to 0.76).
The movement in the British pound was driven by the publication of an Evening Standard/Ipsos survey ahead of the EU referendum.
The survey not only recorded an important increase in potential “remain” voters compared to the previous poll (closed on 20 April), from 49% to 55%, but a good chunk of this shift was driven by an about-turn by Conservative voters who would typically be associated with the Leave vote.
Support for the “leave” campaign dropped from 39% to 37% and – even more importantly – undecided voters decreased from 12% to 8%.
We have noted a clear shift in favour of the British pound and dollar over the past 48 hours.
It is because both of the two currencies are growing in popularity that it does become quite hard to actually call direction in GBP/USD.
“Intra-day volatility, within the broader range, is getting wild to say the least. Having seen 1.4525 resistance rejected a few times and against the back-drop of a strengthening USD, this rate was under pressure back to 1.44 before a straight line move to the 1.46 region. We have strong resistance in the 1.4675 region, with 1.48 above, and technically look for this area to cap for a grind back towards the 1.45 area,” says Robin Wilkin at Lloyds Bank.
There could well emerge a stalemate for this conversion, hence, strength in GBP will likely be best expressed elsewhere.
“With USD’s resurgence now gaining momentum, the better way to play for sterling’s relative resilience appears to be on crosses (EUR, CHF, AUD & CAD),” say Citibank in a brief to clients.
We note the CitiFX Technicals team have decided to go long GBPCAD at 1.8894 targeting the 1.97-1.98 area.
