Fed Tapering Intentions Muddy USD/GBP Outlook

Bank of England governor Mark Carney has a problem. He wants to talk interest rates into staying at low levels, but is doing so against a backdrop of the US Federal Reserve quantitative easing tapering intentions. If he really is committed to this course of action it may mean having to take actions that will be bearish for GBP/USD.

Mark Carney's big idea for the Bank of England's monetary policy is to offer forward guidance on interest rates giving businesses and households an assurance that the cost of money will remain low for years. This is designed to give those sectors more confidence to invest and therefore stimulate economic activity.

But it hasn't worked so far. UK government bond yields have instead taken their cue from US Treasuries, which have been rising on the prospect of the US Federal Reserve slowly withdrawing its $85 billion a month bond buying programme.

GBP/USD support zones around 1.5400.
Resistance clustered around 1.5700

UK monetary policy finely balanced
The UK economy has had a few good months and if the recovery is sustainable then it may be able to absorb higher 'real' interest rates and therefore no intervention might be needed from the Bank of England. For GBPUSD that's a neutral to bullish scenario.

On the other hand if the recovery turns out to be little more than a mirage, and the Fed does go ahead with tapering, then the Bank of England will have to do more than just talking, it will have to act. Under those circumstances it is likely to unleash more quantitative easing to drive down bond yields, which influences the cost of credit to the rest of the economy.

The next few months will be crucial for GBP/USD as it becomes evident whether or not the UK's economic recovery is sustained and ditto the US one, which will dictate if Fed tapering goes ahead or not.

The other issue for GBP/USD is Carney himself. He's new and the forex markets are yet to get used to his style and while they're figuring him out a certain amount of uncertainty will linger.

Disclaimer: This material is considered a public relations communication for general information purposes and does not contain, and should not be construed as containing, investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. MahiFX makes no representation and assumes no liability as to the accuracy or completeness of the information provided.