GBP/USD briefly rises above 1.25 the figure as Fed hikes rates 50bps
|- GBP/USD rallies on the Fed with a relatively muted response in financial markets.
- The Fed hiked rates by 50 basis points and published plans to reduce the size of the balance sheet.
At 1.2522, GBP/USD is 0.22% higher and has rallied around 42 pips in the first 15 minutes on the knee jerk after the Federal Reserve hiked rates by 50 basis points. The Fed's target range stands at 0.75% - 1.00%.
The hike was hawkish and Fed futures are pricing in a higher chance of a 50 basis point hike at the June meeting. 77% priced for 50bps and 23% for a 75 basis point hike. Interest rates futures also suggest a 94% probability of an effective fed funds rate of at least 2.75% at year-end.
The Fed anticipates that ongoing increases in the target range will be appropriate as the central banks if highly attentive to inflation risks.
A press release has also been published with the plans for reducing the size of the balance sheet.
The Committee intends to reduce the Federal Reserve's securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA). Beginning on June 1, principal payments from securities held in the SOMA will be reinvested to the extent that they exceed monthly caps.
For Treasury securities, the cap will initially be set at $30 billion per month and after three months will increase to $60 billion per month. The decline in holdings of Treasury securities under this monthly cap will include Treasury coupon securities and, to the extent that coupon maturities are less than the monthly cap, Treasury bills.
For agency debt and agency mortgage-backed securities, the cap will initially be set at $17.5 billion per month and after three months will increase to $35 billion per month.
Nevertheless, the US dollar has been pressured on the release which has buoyed sterling.
GBP/USD technical analysis
Into the announcements, GBP/USD had been consolidated:
The outcome has done little to shift the structure. On a longer-term basis, GBP/USD has been poised for a downside extension following a brief bullish correction on the daily chart as follows:
If the bulls fail to break beyond the resistance, mounting bearish pressure will likely lead to a downside continuation in due course.
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