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GBP Gains from GDP Report, BoE Rate Hopes - USD to Follow on FOMC?

GBP Gains from GDP Report, BoE Rate Hopes - USD to Follow on FOMC?

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- GBPAUD, GBPNZD reverse losses at familiar support levels.

- EURGBP, EURUSD dip back towards recent lows.

- See the DailyFX economic calendar for Monday, July 27, 2015.

For at least one of the two central banks closest towards raising rates, data and events so far this week have unfolded favorably for policy hawks. We're talking about the Q2'15 UK GDP report and the Bank of England, who may find it increasingly difficult to keep rates on hold at 0.50% for much longer.

Today's report suggests that UK growth rates are ticking towards the high end of historical business cycles, furthering speculation that the BoE will be raising rates sooner than people think. As it stands, markets (per Sterling 90-day options contracts) are pricing in a February 2016 rate hike; whereas policymakers have increasingly indicated that a rate move in 2015 is possible.

The other central bank closest to a rate hike - the Federal Reserve - will be more front and center than the BoE this week, as the Fed sits for its two-day policy meeting that culminates with the 14:00 EDT/18:00 GMT release of the FOMC's policy statement tomorrow. While it's a foregone conclusion that the Fed won't be raising rates tomorrow - neither pundits, nor economists, nor markets (via fed funds futures contract implied probabilities) are pricing in a rate hike by any means - it seems that everyone will be watching the FOMC tomorrow as a guide for the September policy meeting.

Whereas markets are still pricing in a January 2016 rate hike, Fed policymakers - in particular, Fed Chair Janet Yellen - have suggested that a hike in 2015 is very much on track, and with others - St. Louis Fed President James Bullard - calling the September meeting 'effectively a coin toss' for a rate hike.

There is imbalance here: the market is too dovish for the Fed; or the Fed is too hawkish for the market. If the market is misreading the Fed, rising interest rate expectations still need to be priced in, providing the US Dollar with a veritable catalyst going forward; Conversely, if the Fed is too hawkish and ultimately backs off its optimism about at least one rate hike in 2015, the market is more or less already expecting that outcome already, and therefore the downside for the US Dollar may prove to be limited.

See the above video for technical considerations in EURUSD, GBPAUD, GBPNZD, GBPUSD, and the USDOLLAR Index.

Read more:Euro, Yen Rally as Dollar, Equity Markets Slip at Start of FOMC Week

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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