* GBP/USD exchange rate breaks down as Fed suggests three interest rate hikes in 2016
* US Dollar strength forecast to fade in Q1 2017
* Dollar Rates Today: GBP/USD = 1.2650 | EUR/USD = 1.0488 - 0.45%
The Dollar has shot higher on news the US Federal Reserve's Open Market Committee now envisage a faster pace of interest rate rises over coming months.
At their December 14 meeting the FOMC lifted interest rates by 0.25% taking the Fed Funds corridor to 0.50-0.75%. However, it was actually the guidance on future rises that got the Dollar moving.
The dot plot graph that shows where each member of the Committee sees interest rates over coming months and years betrayed the notion that rates will rise at a faster pace than envisaged in September.
The dot plot forecast shows policymakers looking for 3 rate hikes in 2017, this view is more aggressive than the 50bp move they forecasted back in September.
"USD and rate expectations surged on the upwards revision to the Fed’s dot plot, where the median forecast now shows three rate hikes in 2017. Markets now price two 2017 hikes with certainty and a third with a 50% probability," says Adam Cole at RBC Capital Markets. "With hindsight, market pricing was far too sanguine going into the meeting."
Above courtesy of Danske Bank
"When it comes to rate hikes, more is always more. The revelation that 2017 could see three rises rather than two – taking rates this time next year to 1.4%, rather than the 1.1% forecast in September – lit the blue touchpaper for Dollar demand,” says David Lamb, head of dealing at FEXCO Corporate Payments.
Lamb says while it’s likely that many will take profits in the final days before Christmas – removing some of the Greenback’s froth – the Dollar is set to end 2016, and the Obama presidency, in buoyant form.
The message from the Fed will have an important bearing on GBP/USD which, while it has been rising since October, looks to have run into difficulty of late.
Note that the GBP/USD is currently suppressed by the 100 day moving average (the red line) which is blocking fresh advances:
Note too that since the Fed the pair has also broken below the 20 day moving average, denoted by the green line.
This indicates the near-term momentum has turned negative and advocates for further weakness.
"GBP/USD has failed at the 1.2703 resistance line drawn from September. Last week the market failed at the 1.2756 100 day ma and we look for the market to come under increasing downside pressure," says Karen Jones at Commerzbank in London.
Jones looks for the market to drop to the 1.2465 two month uptrend.
"This is now exposed and this remains the break down point to the 1.2090/85 October 11 and 25 lows. Intraday rallies are likely to now struggle circa 1.2600, and remain capped 1.2703/76. Initial support below the uptrend lies at 1.2302/1.2285," says Jones.
Those with currency payment requirements should ensure their FX provider has set the correct buy orders for such an event.
US Dollar Outlook: Strength to Fade in first-Quarter 2017
The Dollar has a strong wind behind it heading into the new year but we are told sometime within the first quarter that wind may fade.
Martin Enlund, the Chief FX Strategist with Nordea Market's Strategy Team says the Fed is taking some risks with their hawkish message.
Enlund argues changes to financial conditions or to US real rates usually impact upon data after a six-month delay, and yesterday’s tightening of financial conditions suggests economists will be disappointed with US data in the first quarter of 2017.
"It’s possible that a Trumphoria in the private sector might offset this effect, but that is usually not the case," says Enlund.
Also watch for the risk of a negative spill-over from the stronger USD on economic activity as exporters are priced out of the global market.
Also consider the negative impact higher US interest rates will have upon the rest of the world - particularly on emerging markets which borrow heavily in Dollars.
"Will global markets positively digest this hawkish message; or will something break? The latter is usually the case," argues Enlund.
The analyst argues that the Fed’s December decision clearly boost the risk that we’ll see further USD-positive moves in the run-up to New Year’s eve, "but the tailwinds for the USD is likely to slacken markedly in Q1, nor should we discount the potential for profit-taking starting to hold the USD back fairly soon."