Federal Reserve decision anticipation weighing on Pound
The UK economy growth slowed in the third quarter. The Bank of England will be meeting next week and is expected to leave the monetary policy unchanged. Will the Pound continue weakening?
The UK economy growth in the third quarter slowed to 0.5% following a 0.7% expansion in the second quarter. Weaker exports together with stronger imports were the main drag for economic growth as imports grew 5.5% on the quarter while exports increased 0.9%. At the same time manufacturing output fell 0.4% and construction contracted 2.2% in the third quarter. The bright spots were gross capital formation which surging 7.2% after falling 7.1% in the second quarter and consumer spending which rose 0.8% for the ninth quarter in a row. Inflation in October recorded 0.1% drop year over year though consumer prices increased 0.1% over the previous month following a 0.1% decrease in September. The Bank of England is expected to meet on December 10 and no change in monetary policy is expected. On this backdrop the Federal Reserve is expected to decide at December 15-16 policy meeting whether to raise interest rates for the first time in the last 9 years. Federal Reserve Chair Janet Yellen’s hawkish comments on Wednesday indicated the central bank is on track to hike rates as Yellen said she was looking forward to interest rate hike that will be a testament to the economy’s recovery. And ADP’s stronger than expected employment report the same day showed private employers added 217000 new jobs against expected 190000. Unless the nonfarm payroll report surprises with unexpectedly low reading for new jobs added in November it is widely expected the Federal Reserve will hike the interest rates in December, further boosting the dollar against other major currencies.
The GBP/USD has been falling for the last two weeks. The pair slipped on Wednesday after Federal Reserve Chair Janet Yellen’s hawkish comments and the stronger-than-expected ADP private employment report. The Parabolic indicator gives a sell signal. The RSI oscillator is falling and is close to oversold zone. The Donchian channel is tilted downward. The MACD indicator is below the signal line and the zero level which is a bearish signal. We believe the bearish momentum will continue after the price closes below the lower Donchian channel at 1.4894. A pending order to sell can be placed below that level. The stop loss can be placed above the last fractal high at 1.5124. After placing the pending order the stop loss is to be moved every day to the next fractal high, following Parabolic signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. If the price meets the stop loss level without reaching the order, we recommend cancelling the position: the market sustains internal changes which were not considered.
| Position | Sell |
| Sell stop | below 1.4894 |
| Stop loss | above 1.5124 |