GBPUSD rates are currently performing well with levels near a 3-month high once more. However, the volatility in the market remains, thanks to trade talks, Brexit, stock market turmoil and political challenges which have resulted in cable rates swinging by over 2.5% in the last 10 days giving a well-timed £200,000 transfer an extra $6,600.
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The discussion with regards to future interest rate hikes has been one of the main topics recently as President Trump pushes his influence on what is supposed to be an independent Federal Reserve (FED). Last week President Trump intensified his attacks on the FED by calling them ‘crazy’. The comment by Trump I don’t think will deter the FED from future interest rate hikes, the next being expected in December as the economy in the US continues to grow with near full employment.
Interest rates are a key driver for a currency in question so with the hike likely, demand for the USD increases as investors seek a higher return in their assets. A topic to watch going forward is the fall in stock markets recently.
Last week the Dow Jones dropped by 800 points in one day which was the largest daily fall in over 8 months, the Nasdaq also fell by over 4% and the S&P (Standard & Poor's 500 - another stock market index) went on the longest daily losing streak for nearly 2 years.
The reason for investors selling stocks came from a higher return being expected in US bonds, concerns about the trade war with China, and as interest rates climb the cost of managing debt for highly-leveraged companies also increases.
Personally, I still think it is very likely that the FED will continue with its interest rate policy and rates will climb in December. Yes, the changing forecast on the likelihood of these increases will impact GBPUSD prices in the short term. The fact remains that the FED is far more likely to raise interest rates before the Bank of England, which will continue to push the value of the dollar up making it more expensive to buy longer term.
Economic data from the US also supports this argument as the economy in the US continues to expand. The US unemployment rate fell to 3.7% in September, its lowest level since 1969. Retail sales data on Monday showed another expansion in spending.
Industrial data yesterday showed a smaller number than expected, however this was put down to the summer holiday period impacting production so is more of a speed bump rather than change in direction.
Next on the horizon is the meeting minutes from the last FED decision, which are due to be released this evening. These will be keenly watched for indicators to support the current expectation for a future interest rate hike. To end the week there is Housing data and the Oil Rig count.
Generally, I personally expect USD strength to continue moving forward medium term with any real rallies for GBPUSD to be seen as a short-term opportunity rather than a long-term change in trend.
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