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Cable rises ahead of FOMC meeting, EUR/GBP weakens -by Ecork

British Pound (GBP) news and analysis

  • GBP/USD rallied ahead of the FOMC meeting, US GDP reading – hawkish Fed data or negative GDP data could trigger a downward move from highs.
  • High-importance data from the US and EU accelerates into the weekend
  • EUR/GBP may rise amid cautious Bank of England rate hike next week but Euro remains weak

The exchanges of the British pound against the US dollar and the Federal Open Market Committee have been considered

In the lead up to the Federal Reserve’s rate decision later today (19:00 GMT), the Pound was already strengthening. The pair moved to pocket a higher rebounding from the upper side of the support zone (1.1940) and put a number of long lower wicks on its way up as well. The pair is now trading above the psychological level of 1.20 but it seems to have bounced off another interesting level, which is the resistance level at 1.2090.

If the committee votes for a 100 basis point hike, like the Bank of Canada earlier this month, we could see the cable heading towards 1.20 and possibly lower. Mention of significant price hikes in the future may also lead to lower requotes in the pair. 1.20 could be at risk if the Fed signals a slower pace of rate hikes going forward.

GBP/USD 2-hour chart

Source: TradingView, prepared by Richard Snow

Dollar Position (DXY) Still High

With the dollar emerging as a crowded trade, any hint of a bearish trend from the Fed either in the interest rate decision or the pressure to follow, could lead to a deflation of the dollar – leading to a retest of 1.2090 for the GBP/USD pair. Markets will be eager to know where the Fed stands on the September increase, whether it is likely to maintain the same pace or pull back given growth concerns.

Positioning in US Dollars (DXY) via CFTC CoT . Report

Sterling Price Forecast: Cable rally ahead of FOMC meeting, EUR/GBP weakening

Source: Refinitiv, CFTC COT report

On the topic of growth concerns, on Thursday we take a first look at US Q2 GDP which likely already took into account the previous day’s Fed rate decision. The Federal Reserve uses the Internal GDP Forecasting Tool (GDPNow) if a price decision is due before GDP data is released and is calculated using a methodology similar to that of the Bureau of Economic Analysis.

Economists expect a tight escape from US recession while unofficial GDP reading now puts US into recession, forecasts 1.6% Q2 contraction – someone will be proven wrong, so expect continued volatility Thursday after the FOMC event Open on Wednesday.

Sterling Price Forecast: Cable rally ahead of FOMC meeting, EUR/GBP weakening

Customize and filter live economic data via DaliyFX Economic calendar

European fundamentals are getting worse

The Euro continues to struggle despite rising 50 basis points earlier this month as the risk of winter gas rationing approaches reality. The European Union has agreed to cut gas consumption in a bid to boost storage numbers ahead of the winter months. However, Russia has reduced gas flows from 40% to 20% due to technical issues, and has given the euro no interest.

The EUR/GBP broke through the 0.8500 level and continued to decline, rising yesterday. The decline appears to have been halted at the intersection of the 0.8410 level and the 61.8% Fibonacci retracement of the March to June move. A reversal from here seems unlikely given the fundamental backdrop of the Eurozone but could emerge if the BoE disappoints next week. Respondents to a Reuters poll suggest that the potential for a 25 and 50 basis point rise is closer to 50/50 than market expectations (93% of a 50 basis point rise) revealed.

Sterling Price Forecast: Cable rally ahead of FOMC meeting, EUR/GBP weakening

EUR/GBP daily chart

Sterling Price Forecast: Cable rally ahead of FOMC meeting, EUR/GBP weakening

Source: TradingView, prepared by Richard Snow

Written by Richard Snow for DailyFX.com

Connect with Richard and follow him on Twitter: Tweet embednowFX

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