Forex: GBP/USD drops on US budget agreement

on Dec 11, 2013
Updated: Oct 21, 2019

**, Wednesday 11 December:**

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The GBP/USD has coughed up three days of gains today since news of a bi-partisan budget agreement reached overnight UTC by negotiators in Washington DC.
If the accord is approved by the US Congress, it will avert a repeat in mid-January of October’s federal government shutdown, while also reducing federal spending cuts by $63 billion in 2014. US Fed-watchers are in growing numbers seeing the accord as removing one hurdle for the central bank to start trimming stimulus as soon as next week.

According to Nordea Markets chief US analyst Johny Jacobsen, while the deal may not be ‘the grand bargain’, “it could provide a positive boost to the [US] economy by restoring confidence in the ability of Republicans and Democrats to work together after years of destabilising brinkmanship”.

Although the agreement doesn’t address the need to raise the US debt ceiling, Jacobsen believes it is “yet another green light for the Fed to start tapering very soon”, because Washington has significantly lowered the risk of another US fiscal stalemate in 2014.
The pound reached a two-day low of 1.6372 in European trading earlier today, as the pair retreated further from its high for the year at 1.6465. If sterling slips further, the bulls may be rejuvenated by the rising line of support which has limited bearish overtures since 14 November.

Further to the downside, the GBP/USD could find fresh buying near the 23.6 percent Fibonacci retracement of the uptrend from 1.5854. The RSI momentum indicator on the hourly chart has today entered oversold territory, reaching a one-month low of 24.35
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Meanwhile in London today, Martin Weale, an external member of the Bank of England’s Monetary Policy Committee, said that the bank’s forward guidance on interest rates may have had little effect on either the economy or the pace of recovery.

“If forward guidance has done no more than to codify what people had expected the Monetary Policy Committee to do anyway, then its effects on the profile of expected future rates, and thus on output and inflation, should be expected to be small.” Weale’s observations suggest a central bank whose key players are far from unanimous over the virtues of forward guidance.
After the markets learned of Weale’s words, the GBP/USD bounced off its intraday low and the pound is currently trading at around 1.6382, to be down 0.39 percent intraday.
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