GBP/USD rallies 30 pips as FOMC prepares to cut rates in the future

• GBP/USD has rallied as the FOMC prepares to cut rates if necessary.
• GBP/USD rallied from over 30 pips into the +0.80s% so far for the session.

GBP/USD is moving higher following the Federal Open Market Committee's meeting, (FOMC). The FOMC has left rates and policy on hold but has signalled to the market an easing bias by dropping language saying it would be 'patient' on future policy adjustments and that they are closely monitoring and will act as appropriate. The balance sheet roll off will proceed as planned. 

Ahead of the FOMC, cable was sitting up by 0.60% at 1.2634, but has moved to session highs of 1.2653 and into the +0.70s% for the day, so far. 10 year US yields have also dropped, falling to 2.064%. The bond market was already expecting significant rate cuts for 2019 with the 10 year US yield trading between 2.0530% and 2.0990%, well down from the 2019 high of 2.80%.

• CME FedWatch Tool shows 89% chance of a 25 bps rate cut in July

Statement comparison:

 

FOMC main takeaways:

• Interest rate on excess reserves unchanged at 2.35%.
• Benchmark interest rate unchanged; target range stands at 2.25-2.50%.
• Drops language saying it would be 'patient' on future policy adjustments.
• Uncertainties have increased regarding outlook for sustained economic expansion.
• 9:1 policy vote, Fed's Bullard dissented because he wanted a rate cut
• To act as appropriate to sustain econ. expansion with a strong labour market, inflation near target
• Economic activity is rising at a moderate rate
• Household spending appears to have picked up but business fixed investment has been soft

Dot Plot

 

UK fundamentals

Elsewhere, Brexit is a spanner in the works for the pound. The latest development related to the progress has been with the race to the Conservative leadership with Brexiteer Boris Johnson leading the race. More on that here with today's third ballot taking place a little earlier in the session:

• Third ballot results of the race for the Conservative leadership

Also, UK data was a booster for sterling and hawks at the Bank of England whereby, on Thursday, the Bank of England will announce its decision on monetary policy.

No chance in rates is expected, but there has been a hawkish twist to the BoE of late with some members of the MPC calling for rate hikes despite Brexit concerns. Data released today showed inflation in May reached 3% (y/y) in the UK, slightly above expectations, but none the less, in an environment where other central banks easing, to at least, are moving towards an easing bias, then that should be a supportive factor for sterling and attractive for investors. 

GBP/USD levels

Ahead of the FOMC, cable was sitting up by 0.60% at 1.2634 but shot higher to session highs of 1.2673. However, overall, the market will likely remain directly offered below the 7 th June high at 1.2763 according to analysts at Commerzbank:

"It will need to regain the February low at 1.2772 on a closing basis in order to alleviate immediate downside pressure and avert further losses to the 1.2444 December 2018 low. This is the last defence for 1.2108, the 78.6% retracement of the move up from 2016."