GBP/USD under pressure as US dollar is thrown a lifeline by less dovish Fed

  • GBP/USD bulls capped in their Brexit-deal sentiment related to progress on less dovish FOMC.
  • FOMC was inactive in their last meeting for the year, tweaking QE guidance to a less dovish stance. 

GBP/USD is currently trading at 1.3458 and between a low of 1.3434 and a high of 1.3554 following the outcome of the less dovish and last Federal Open Market Committee’s meeting for 2020.

The two-day meeting was concluding with the Federal Reserve’s interest rate decision, monetary policy announcements and statement.

The Fed has already mentioned tapering QE after “substantial progress”.

The Federal Reserve has noted near-term downside risks, but it seems that they have not been enough for a case for WAM extension which is what the market had been expecting. 

A WAM extension would bull flatten the curve and likely weigh on the greenback, but inaction from the Fed has lifted the greenback as follows:

DXY daily chart

As illustrated, there is now the potential for a bottoming W-formation pattern that would target the 21-day moving average and confluence with prior support structure and a full 61.8% Fibonacci retracement. 

Key FOMC takeaways, so far

  • US Fede holds benchmark interest rate unchanged at 0% to 0.25%.
  • Target range stands at 0.00% – 0.25% .
  • The interest rate on excess reserves unchanged at 0.10%.
  • Dot plot at end of 2023 remains at zero.
  • Will continue pace of bond buys until ‘substantial’ progress on goals.
  • Will continue to buy $80b/month in treasuries and $40b/month in MBS.
  • Will continue bond buys “until substantial further progress has been made toward the committee’s maximum employment and price stability goals.”
  • Repeats that “the ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term”.
  • Fed sees US GDP down 2.4% in 2020, up 4.2% in 2021 and up 3.2% in 2022.
  • Fed sees unemployment rate at 6.7% in 2020, 5% in 2021 and 4.2% in 2022.

All in all, this is slightly less dovish than expected.

The fact that the Fed has now stated that it will taper after “substantial progress” but will keep policy “accommodative” until they “achieve inflation moderately above 2 per cent for some time,” is what has investors recalibrating their portfolios. 

The presser will be revealing a potential minefield for gold traders as Fed’s Chair Powell will be questioned on the above, starting now. 

Additional forward guidance linking QE to economic outcomes along with an extension in the weighted average maturity of Treasury purchases will be a hot topic for the presser. 

However, markets are already in anticipation of a fiscal deal and nominal yields may remain capped, keeping real rates reverting on a downward trajectory and weighing on the USD for the near and medium-term.

Brexit-deal sentiment has gained traction

Positive soundings from the European Union on Brexit talks helped lift investor sentiment and the pound on Wednesday with a possible Brexit deal before the year-end helping to strengthen cable over 2% this week.

On Tuesday, tweets from a BBC political reporter stating that Conservative Party lawmakers think that Britain is heading towards a deal with the EU supported the pound.

this was then followed up today with the EU’s chief executive explaining that while she could not say if there would be a trade deal with Britain, they had been progressing and the next few days would be critical.

Ursula von der Leyen said discussions on access to British fishing waters for EU vessels were “still very difficult”.

However, she also said that negotiators had moved forward on the other most contentious element, the guarantees of fair competition for companies. 

 

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