The GBP/USD is one of the most heavily traded currency pairs on the market today; and for a good reason. The pair combines two large currencies. This leads to heavy volatility and several opportunities for profit. With a looming decision by the Federal Reserve to raise or not to raise US interest rates, we’re seeing even more volatility now than ever before. Today, we’ll talk about how the Federal Reserve’s decision plays a role in the movement in the market, whether or not the Fed is likely to raise rates, and what we can expect to see from the pair throughout the rest of the year 2015.
Why the Federal Reserve Interest Rate Plays a Role in the GBP/USD
The United States Federal Reserve creates and upholds monetary policy in the United States. This means that the decisions they make will either help or hinder growth of the USD. Years ago, in the midst of the worldwide financial recession of 2008 and 2009, the US Federal Reserve made the decision to reduce interest rates to an all-time record low in an attempt to boost US economic activity. This move caused the USD to grow; continuing an upward trajectory until earlier this year. However, throughout the year, the Federal Reserve has stated that it plans on increasing rates by the end of 2015. Considering the fact that low rates were designed to help the US economy and have led to increases in the value of the United States Dollar, it only makes sense that an interest rate increase would do the opposite. Therefore, day traders are watching the Federal Reserve closely as many experts are expecting a rate hike.
Is the Federal Reserve Likely to Increase Interest Rates?
The answer to the question above is “Yes”. At some point, the Federal Reserve will have no choice, but to increase interest rates. However, the bigger question here is “When will the Federal Reserve increase rates?” That one is a bit harder to answer. However, I don’t think we’re going to see a rate increase by the end of the month. Here’s why…
★ Worldwide Economies Are Struggling
If you follow finance at all, chances are that you’ve heard quite a bit about economic conditions in China, Europe, and several other countries that are struggling at the moment. The bottom line is that economies around the world depend upon each other; and with economic hardships throughout, an interest rate increase simply doesn’t make sense.
★ Poor US Market Conditions
The US Federal Reserve isn’t only making this decision on the state of the US economy; it’s also taking into account the state of US markets. Throughout the past couple of weeks, we’ve seen all major blue-chip indices in the United States decline heavily; which is likely to put a damper on rate increases.
★ US Jobs Report
Finally, the US jobs report for August was a bit disappointing. In the month, only 174,000 jobs were added; a sharp contrast from the more than 200,000 that were expected. This data shows that the economy in the US is starting to slow as well; which is likely to hinder a rate increase.
What We Can Expect to See from the GBP/USD
In my opinion, much of the movement from the GBP/USD is going to be directly tied to the Federal Reserve’s decision. If the Fed decides to increase interest rates, we can expect to see gains in the pair. Adversely, if the decision is to keep the rates the same, we’re likely to see declines. Currently, I don’t think that the worldwide economy, nor the United States economy or the US market is currently healthy enough to undergo a rate increase without causing turmoil. Therefore, I don’t think that an increase is likely to happen by the end of the month. I also think that chances of a rate increase by the end of the year are slim. With that said, I’m expecting to see a continuation of turbulence in the GBP/USD with an overall downtrend throughout the rest of the year. The good news is that day traders who take advantage of binary options or forex trading may have the ability to profit no matter which direction the pair moves. With everything that’s going on surrounding these currencies, there could be plenty of opportunities for profit!
What Do You Think?
Where do you think the GBP/USD is headed and why? Let us know in the comments below.