Trading Trends in the Cable
The GBP/USD currency pair is currently trading around the 1.34 level, and has been hovering thereabouts for several days. For the year to date, the GBP has appreciated from a low of 1.23 for a $0.10 rise. The direction of this currency pair is going to hinge on the short-term outcome of the Fed meeting on Wednesday, 13 December 2017.
Heading into the final Fed meeting of the year, the CME Group FedWatch tool priced in a 90.2% probability of interest rates rising in the range 1.25% – 1.50%. Forecasters have issued a paltry 9.8% probability of rates rising to 1.50% – 1.75%. The current GDP growth rate in the US is 3.3%, the unemployment rate is holding steady at 4.1%, and the inflation rate was last measured at 2%. The current interest rate has remained unchanged since July 2017 at 1.00% – 1.25%.
USD Likely to Benefit from Tightening Activity
If the Fed decides to raise interest rates, despite inflation concerns, this will make the USD inherently more attractive to foreign buyers. A GBP selloff may take place and we could see further weakening towards the 50-day moving average level of 1.324, possibly edging lower towards the 200-day moving average of 1.296.
Other important economic indicators that have found their way onto markets include the US job openings which are now at a 5-month low. In October, job openings decreased to 5.996 million, from a September figure of 6.177 million. This indicates a tightening of the US economy, which should invariably result in higher wages and higher inflation.
Despite lackluster increases to US wage growth, the Fed is likely to push ahead unhindered, and increase interest rates for the final time in 2017. Various major macroeconomic changes are in the works, including the imminent passage of a tax bill which will reduce corporate taxes from over 35% to approximately 20%, and make the entire US tax paradigm more simplified. This could be a dramatic boon to the US economy and it will result in an influx of venture capital and demand for the USD.
The Tone Will Determine Speculative Sentiment for Forex Traders
Analysts remain divided about the precise scope and timing of rate hikes, suffice it to say they are looking at fast-tracking additional rate hikes. In the UK, the Bank of England will be meeting to discuss monetary policy with the MPC (Monetary Policy Committee). With the BOE and the Fed, the most essential elements of the upcoming meetings relates to the language used by the monetary authorities.
The devil is always in the details.
The biggest benefactor of any meaningful tax legislation will be the financial sector, notably the banks, insurance companies, FinTech Enterprises etc. They currently pay tax rates of 30%, and dramatic tax reductions will boost the profitability of bank stocks no end. We can expect US banks to benefit substantially from the double boon of increasing interest rates (the federal funds rate is trending bullish), and tax reform.
Banks like Wells Fargo & Company, Bank of America, Citibank, JP Morgan, and Goldman Sachs are likely to be given a bolus of adrenaline from this double shot. 2018 will see massive inflows into the financial markets through bank stocks. This should benefit major US indices and the USD.
As such, a GBP comeback although possible is unlikely in 2018. Unfortunately, hopes of a dramatic boost to GBP after the breakthrough initiated between Prime Minister Theresa May and Juncker did not result in a significant bounce for sterling. For now, sterling is likely to have a little breathing space before the onslaught begins all over again.
Do you feel that a Fed rate hike and tax reform will hinder the GBP? Will recent negotiations between Brexit secretary David Davis and his EU counterpart Michel Barnier be beneficial to sterling?
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.