This report will examine how a US interest rate increase could affect exchange rates.

US economic data hints to an interest rate hike

Throughout 2015 talks have continued to intensify in regards to the Federal Reserve hiking Interest Rates. Janet Yellen Chairwoman from the FED has repeatedly indicated a rate hike is data dependant however could occur on the 16th of this month. With Non-Farm payroll numbers exceeding expectations for the last 3 months and the US unemployment rate at a 5 year low, a rate hike is looking more likely.

However there are no guarantees with the currency markets. It was only last week the European Central Bank did not live up to their own hype, as they had been indicating throughout November they would be extending and increasing the amount of quantitative easing. This simply did not occur. We saw an extension but not an increase in the amount each month. Therefore it wouldn’t surprise me if Janet Yellen and the FED follow in the ECB’s footsteps and change their tune last minute and disappoint the markets.

USD/EUR relationship and how this will impact GBP/USD and GBP/EUR exchange rates

For clients trading GBPUSD and GBPEUR for the remainder of 2015 and throughout 2016 the Interest Rate Decision on the 16th could heavily influence the exchange rate you will receive. Janet Yellen has repeatedly stated if a hike occurs it’s going to be gradual, therefore a hike this month indicates we may see 2 or hikes throughout 2016.

It appears speculators have already begun selling their Euros to buy US dollars in the anticipation of a rate hike. However on the day I anticipate a major sell off of one currency to buy the other depending on the outcome of the decision. If we see a rate hike investors will buy USD with their Euros for larger returns on their investments and because of this sterling will lose ground against the US Dollar but make gains against the Euro. However if the FED decide to hold back on hiking interest rates I expect speculators will reverse their speculative trades and Sterling will therefore make ground against the Dollar but lose value against the Euro.

The US interest rate decision is the last major announcement for 2016 and could move exchange rates by cents. Therefore if you are trading in 2015 or early 2016 I would recommend contacting your broker as soon as possible.

Data watch

The most important data release this week for the greenback is Retail Sales figures on Friday at 1.30pm. Retail Sales measures the total receipts of retail stores. With an increase of 0.2% expected we could see the greenback strengthen against sterling at the end of the week.

For more information about GBP/USD exchange rates please email me at drl@currencies.co.uk.

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Exchange rates on this page are interbank rates and indicate where the market is trading to show the performance of a currency pair. They are not indicative of the rates which we offer. The information on this web site is provided free of charge for information purposes only. It does not constitute advice to any person on any matter. Foreign Currency Direct plc. ("FCD") makes every reasonable effort to ensure that this information is accurate and complete but assumes no responsibility for and gives no warranty with regard to the same.