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Fate of GBP/USD Relief Rally Hinges on FOMC/BoE Rate Decisions

Fate of GBP/USD Relief Rally Hinges on FOMC/BoE Rate Decisions

Fundamental Forecast for the British Pound: Neutral

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Key developments coming out of the U.K. & U.S. are likely to spark increased volatility in GBP/USD as the Federal Open Market Committee (FOMC) is widely anticipated to raise the benchmark interest rate ahead of 2017, but the pair stands at risk of extending the relief rally following the British Pound ‘flash crash’ should the Bank of England (BoE) continue to talk down expectations for additional monetary support.

Market participants may show a limited reaction to the U.S. data prints due out next week as the focus shifts to the Fed’s last interest rate decision for 2016. With Fed Funds Futures highlighting a greater than 95% probability for a December rate-hike, the fresh projections for growth, inflation and the interest rate may play a greater role in driving U.S. dollar price action the as committee appear to be on course to further normalize monetary policy in the year ahead. However, the central bank communication may differ from recent years, with Chair Janet Yellen and Co. merely calling for one or maybe two rate-hikes for 2017 as ‘the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.’ With that said, the post-election USD rally may face a near-term pullback should Fed officials tame interest expectations and largely endorse a wait-and-see approach for monetary policy.

In contrast, the BoE is expected to carry the current policy into the year ahead, but the major data prints coming out of the region may encourage the central bank to adopt a more hawkish tone as the U.K. Consumer Price Index (CPI) is projected to uptick in November, while Average Weekly Earnings excluding bonuses are expected to climb an annualized 2.6% in October following a 2.4% expansion the month prior. Signs of strong wage & price growth may push the Monetary Policy Committee (MPC) to gradually move away from its easing-cycle as Governor Mark Carney and Co. warn ‘there are limits, however, to the extent to which above-target inflation can be tolerated.’ As a result, the bearish sentiment surrounding the sterling may continue to unravel over the remainder of the year should the BoE further shift the monetary policy outlook.

In turn, GBP/USD may extend the relief rally following the British Pound ‘flash crash’ as it continues to trade within the upward trending channel from the October low (1.1905), with the former-support zone around 1.2860 (61.8% retracement) to 1.2950 (23.6% expansion) on the radar. However, the recent developments in the Relative Strength Index (RSI) suggests the near-term advance is getting exhausted as the oscillator struggles to preserve the bullish formation carried over from the same period, and the long-term bearish trend may reassert itself going into 2017 should the pound-dollar struggle to hold the monthly opening range for December. - DS

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.