First to Raise Interest Rates: UK or US? | GBP/USD ahead of FOMC
8:40 AM (EST) Update
With the governments of two of our dancing currency pairs close to raising interest rates, let's take a look at Mr. British Pound as he dances against Ms. USA on the forex dance floor. Who will raise interest rates first: The UK or the US?
Today's report suggests that UK growth rates are ticking towards the high end of historical business cycles, furthering speculation that the BoE will be raising rates sooner than people think. Q2'15 UK GDP report and the Bank of England, who may find it increasingly difficult to keep rates on hold at 0.50% for much longer. As it stands, markets (per Sterling 90-day options contracts) are pricing in a February 2016 rate hike; whereas policymakers have increasingly indicated that a rate move in 2015 is possible.
Ms. USA could be in for a wild ride tomorrow with the FOMC set to announce their monetary policy decision at 6:00 pm GMT. While Fed Chairperson Janet Yellen and her gang of policymakers aren’t expected to make any major changes at this point, market watchers will be on the lookout for clues on when it might take place.
So far, the June FOMC statement was a bit of a disappointment, as the Fed seemed hesitant to commit to a September rate hike. Yellen explained that no decision has been made on the actual timing of their hike but said that “the committee obviously thinks that the economy is likely to do well enough to call, likely call, for some tightening later this year.” But the gang also hinted that two interest rate hikes might be seen before the end of the year.
This week's FOMC meeting should not bring much changes since Fed head Yellen doesn’t have a scheduled press conference afterwards. She might however decide to downplay the importance of the first rate hike, reminding market participants that the longer-term pace of tightening would be more crucial. But that's what the Invest Diva followers are after anyways, right?
As you have learned in the Invest Diva Education Course, Ms. USA's short-term reaction really depends on the tone of the FOMC’s statement, with a hawkish announcement likely to spur strong gains and a cautious tone set to trigger dollar weakness. Bear in mind that their next policy announcement is actually in September, which means that it’s now or never when it comes to letting market watchers know what they plan to do by then.
For long term planners, make sure to sit aside with your stops and limits wide open ahead of the event. Keep in mind that a rate hike is only one factor in a currency strength. commodities, oil prices and gold could also play major role in US dollar strength as well.
The GBP/USD pair continues to trade within an upward channel testing the 38% Fibonacci level at 1.5580.The pair entered the Ichimoku cloud on Friday but soon after formed a spinning top on the daily chart followed by a bullish engulfing candlestick pattern which could be an indication further up moves. Our bullish target is set at 1.5890 at 50% Fibonacci.
If you’re gutsy enough to trade during the FOMC announcement on Wednesday, don’t forget to practice sound risk management. And if you’re not a fan of potentially large price swings, there ain’t no shame in sitting on the sidelines and just figuring out how the FOMC statement could affect longer-term trends.
A break below 1.52 would change our outlook to bearish with 1.50 as first alternative target.
Where to set your stops and limits:
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