The Sterling Dollar exchange rate has steadily lost ground over the month of December. The price has moved from a high of 1.5250 down to a low of 1.4800. The catalyst for this move was the long awaited move by the Federal Reserve to raise interest rates by 25 basis points from their historically low levels. The move was widely anticipated however the FOMC also adjusted the future path of interest rate hikes and now expects to raise rate by 1 % in 2016 if the economy continues to improve.
Monetary policy by the respective central banks have been driving foreign exchange markets in the second half of the year and with interest rate markets now pushing back expectations of a rate hike in the UK, the back end of next year the Pound has lost some of its lustre. For now, unless there is a significant improvement in the economic landscape in the UK then the Pound may find it difficult to sustain any meaningful rallies.
In light of any tier 1 data, rhetoric has played a large part in near term direction of the Pound and earlier this week noted hawk Martin Weale inferred that he is unlikely to vote for higher rates in the near future. With wages not rising and inflation staying lower for longer, he now feels that the Bank of England has “breathing space” before pulling the trigger on a rate rise. This leaves Ian McCafferty as the lone hawk on the committee and makes it even less likely that policy makers will be tempted to move from their accommodative position in the short term.
Unless UK data is highly erratic it would seem that the MPC will be in pause mode for the foreseeable future. With that in mind, markets will most likely look to data in the US for near term direction and Non-Farm Payrolls on the 8th January will be very closely watched. Another strong reading of above 200,000 is expected and should see the Dollar continue its march higher.
For USD Buyers
Sterling has now fallen through trend line support and it is difficult to see it making any gains. 1.4900 would be the initial target for any pullback and I would definitely suggest covering a portion of any exposure if we see 1.5000 again. The break of the trend line would suggest that we will test the 2015 low of 1.4550.
For USD Sellers
It’s looking rosy for Dollar sellers as we have now broken the channel support. A test of the 1.4550 2015 low looks likely unless we break back above 1.4900 or a deeper correction to 1.5000.