The GBP/USD has been relatively range bound with the last four trading days opening near the 1.5950 price level. However, we have seen significant volatility on an intra-day basis with a high of 1.6127 and low of 1.5804 during the same period.
[B]GBP/USD[/B]
The GBP/USD has been relatively range bound with the last four trading days opening near the 1.5950 price level. However, we have seen significant volatility on an intra-day basis with a high of 1.6127 and low of 1.5804 during the same period. The pair has started to see its correlation to risk fade which has been the main driver of price over the past year. However, interest rate expectations for the BoE and the Fed have failed to increase their influence leaving the pair directionless. The U.K. and global economy appear to be at a crossroads as the current recovery has failed to convince markets that it has sustainability. Indeed, British and U.S. manufacturers saw activity decline in September as the boost from the inventory cycle has started to fade. The upcoming BoE rate decision may spark volatility but until then the pound/dollar may remain anchored to current levels.
[B]BoE Interest Rate Expectations[/B]
Overnight index swaps are pricing in 71 bps of rate hikes for the BoE over the next twelve months which is near its six month average. The past few days have seen a sharp decline from the post GDP boost which pushed expectations above 90.0 for the first time since early August. The final growth reading for the second quarter was revised higher to -0.6% from -0.7%, as production output was better than expected. However this may not influence the central bank during this week’s policy meeting as they still have concerns over tight lending standards for consumers and small businesses. Indeed, the BoE loosened its criteria for banks and building societies to be able to open a reserve account at the central bank in order to provide additional liquidity to smaller companies. If today’s action is any indication then we could see additional measures from policy markers at Thursday rate announcement which would significantly lower any expectations for a rate increase over the near-term.
[B]FOMC Interest Rate Expectations[/B]
Fed funds futures are currently pricing in a 0.0% chance of a rate hike by the end of the year following Friday’s disappointing employment report. It is widely expected that the FOMC will remain on hold until there is evidence that job growth is returning, which now appears at the earliest will be the second quarter of 2010. Policy makers will most likely take their cue from consumption trends over the holiday shopping period to determine the potential for future employment. Therefore, next week’s advance retail sales figures could be significant as they are expected to set the pace for the remainder of the year.
[B]Risk[/B]
Equity markets started finding support at the end of last week despite several disappointing fundamental indicators. Therefore, it is no surprise to see stocks higher today on the back of the positive U.S. ISM service report. The gauge beat expectations of 50.0 with a 50.9 reading signaling expansion in the sector as business activity and new orders saw solid gains. Although, the GBP/USD has started to lose its correlation with risk it remains its greatest influence and any sustained movement in stocks should be taken into consideration by traders with Sterling positions.
[I]To discuss this report or be added to the email list contact John Rivera, Currency Analyst: <[email protected]>[/I]