17 December 2015

So, the biggest event since a loaf of bread arrived in sliced format finally came round last night (UK time). Nope, not Ewoks and Storm troopers walking round Leicester Square for the Star Wars premiere but the Federal Reserve meeting. Both do have a cast of alien characters though it must be said.

After the relentless build up to the Federal Reserve meeting surprisingly Janet Yellen did pretty much what was expected and raised rates by 0.25%. The accompanying statement from Yellen was dovish in tone as she stated that future rate rises would be gradual and very much dependent on incoming data. The Fed has always been data driven so it doesn’t come as a great surprise.  

The recovery in the US has clearly gathered momentum. Unemployment rates have steadied around the 5% level and inflation has risen from 0.2% to 0.5%. We expect four rate rises in 2016 and another four in 2017. As mentioned above, these will of course be data dependent with a large focus on unemployment and inflation figures and the Fed will of course examine realised and expected economic conditions.

What has happened to the US Dollar after the meeting? Yep, you guessed it, the US Dollar has strengthened.

If you have a requirement to convert USD into GBP I would suggest now is a very good time to do so on SPOT compared with where we have been recently. Please contact myself or one of the trading team to cover off some of your exposure on a SPOT basis.

Do you think the US Dollar will continue to strengthen? If so, consider placing market orders to the downside.

If you have a look at the graph below you can see we have just entered a major area of support 1.493-1.49 which could represent the short-term lower limit of the pairs trading range. However, I would say it is worth watching what happens here as a break below 1.49 the figure could lead us to some serious downside with 1.4620 being the next major level of support (It is the first target (50 fib) of a projection of the downtrend which started in mid-2014 and which we retraced partly in the first half of this year.

As I’ve stated for numerous months and bored you to tears with I expect GBP/USD to move lower. Don’t be surprised if we hit 1.45 in January. How will sub 1.50 the figure affect your business going into next year with the potential for GBP/USD to fall to 1.40 or below not unrealistic?

If however we do bounce from the support range we have just entered (1.4930-1.49) likely upper limits for the medium-term trading range are 1.50 and then 1.522. A break above 1.522 could lead us to further upside and an increase in volatility, as shorts try and cover their trades, towards the 1.55 handle.

As I always say, doing nothing is speculating. Please have a plan in place. If you have any questions please do let me know.

Have a great weekend and enjoy the crowds whilst shopping!

Written by Liam Alexander