Pound Stands Firm Against Dollar Despite Probability of December Fed Hike Rising to 70%

The US Dollar retains a bullish undertone with markets continuing to cement expectations for an interest rate rise at the US Federal Reserve in December.

The US Dollar retains its dominant tone on global FX markets with expectations for a Federal Reserve interest rate rise in December rising to a 70% probability according to market measures.

The latest advance in the Dollar index is largely a reflection of the US currency’s surge relative to the Euro, which at $1.088, is at a seven-month low against the greenback.

"Last week’s 0.71% advance took the Dollar Index back to levels that were last seen in January and the only real caveat to the bull case at this point is that it is starting to look fairly overbought on a short-term view. However, the bull case for the Dollar is very much intact," says Bill McNamara at Charles Stanley.

Driving these pro-USD expectations were speeches from Federal Reserve officials who spoke on Monday the 24th with the tone being positive.

FOMC voter Bullard repeated his view that rate increase will be needed and that December is the most likely for a rate rise, even though there's "no urgency" to raise rates.

Fed President Evans who is typically reticent to raising interest rates said the labour market and economy are doing well and noted that its good news inflation is moving closer to target. He suggests three interest rate rises may be required before the end of 2017.

Evans suggests inflation remains historically low and there's a need to show commitment to the inflation target, which does suggest he could be swayed from advocating for interest rate rises unless inflation doesn't steadily grow over coming weeks.

Despite the pro-USD undertones, Sterling has managed to defend its recent relief bounce.

The Pound continues to consolidate a tight range with analysts telling us that it appears a base in GBP/USD could finally be forming.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3323▼ -0.02% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.287 - 1.2924
**Independent Specialist	1.3137 - 1.319 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Chart View: Downtrend Could Have Ended

There has been a rebound from the lows established following the spike down on fat-finger Friday.

The sudden sell-off formed an extremely long bar which is normally indicative of exhaustion and increases the probabilities of a reaction higher.

The triangle which formed before the flash crash caused a breakdown is normally a pattern found in the penultimate stage of a trend.

This suggests that the breakdown during the crash was the final move in the downtrend and that the trend may now have ended.

The MACD momentum indicator in the bottom pane is crossing its signal line providing a bullish signal and a sign that bearish investors should exit their positions.

Although the recovery is only small and composed of probably three waves a break above the 1.2334 highs would confirm a continuation higher to the next target at 1.2500.

The Pound: Brexit Headlines, GDP Data Ahead

As for the Pound, the most significant release in the week ahead is Thursday's Q3 GDP, which is forecast to come out at 0.3% qoq in the third quarter, and to show a 2.1% rise year-on -year.

Despite Brexit uncertainty, UK data remains robust with last week's retail sales data being particularly encouraging for the services-lead economy.

We believe however that data will play second-fiddle to news headlines concerning Brexit and which way the government is swinging on the bard-versus-soft Brexit scale.

The outlook for the GBP/USD could be driven on how the current battle in the UK courts over whether Parliament should have more say over the triggering of Article 50 resolves itself.

A win for the claimants could see a rally in Sterling as it would mean a much greater chance of a watered down Brexit with more of an emphasis on securing trade links rather than the immigration control.

There is no set time for the announcement of the ruling so those with an interest in Sterling should keep a close eye on newsflow.

Data for the Dollar

This week’s data highlight for the dollar is the release of third quarter GDP data.

This will be the first time markets will have seen third quarter growth data and the result is likely to have a significant impact on expectations of when the Federal Reserve will increase interest rates.

Currently, there is a greater than 50% probability that the Fed will increase rates by 0.25% or more in December.

Analysts estimates are for a rise in growth of 2.7% in Q3.

Other data includes Core Durable Goods in September and Pending Home Sales in October – which are both out on Thursday. Pending home sales are forecast to have risen to 1.2% and Core Durable Goods Orders are forecast to have risen by 0.2%.

On Tuesday, Consumer Confidence is out, and expected to show a fall to 102.0 from 104.1.

New Home Sales in October, out on Wednesday are forecast to rise by 610k.