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GBP/USD Risks Larger Rebound on Fed Doves; Higher-Lows in Focus

GBP/USD Risks Larger Rebound on Fed Doves; Higher-Lows in Focus

2014-09-19 00:30:00
David Song, Currency Strategist
GBP/USD Risks Larger Rebound on Fed Doves; Higher-Lows in Focus

Fundamental Forecast for Pound:Bullish

The GBP/USD fell back from a fresh weekly high of 1.6523 even as Scotland voted to stay within the U.K., but fresh commentary coming out of the Federal Reserve may spur a further advance in the exchange rate should the group of central bank doves talk down interest rate expectations.

A further expansion in U.K. home loans may encourage an improved outlook for growth, but market participants may ultimately turn a blind eye to the minor data prints coming out of the U.K. as the Federal Open Market Committee (FOMC) is widely expected to halt its quantitative easing (QE) program at the October 29 meeting. The key speeches by Fed voting-members William Dudley, Narayana Kocherlakota Jerome Powell and Loretta Mester may play a greater role in driving the GBP/USD next week amid growing speculation of seeing a rate hike sooner rather than later.

Indeed, a greater emphasis to retain the zero-interest rate policy (ZIRP) for an extended period of time may undermine the bullish sentiment surrounding the greenback as Credit Suisse Overnight Index Swaps show a jump in interest rate expectations, with bets of seeing at least 50bp worth of rate hikes in the next 12-months. As a result, a wave of dovish remarks from Fed officials may generate a more meaningful rebound in the GBP/USD as the Bank of England (BoE) sticks to its current course for normalizing monetary policy.

Despite the failure to hold above the 1.6500 handle, the recent series of higher-lows in the GBP/USD certainly paints a constructive outlook for the British Pound, and we may see the pound-dollar break out of the downward trending channel carried over from back in July should the group of Fed officials remain reluctant to move away from the highly accommodative policy stance. - DS

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