GBP USD dives as dollar surges on renewed US rate hike speculation

GBP/USD (daily chart shown below) took the worst dive in nearly four weeks on Tuesday as renewed speculation over a 2015 Fed rate hike boosted the dollar, while perceptions of a relatively more dovish Bank of England (BOE) weighed on the pound.

Although the BOE is also widely expected to raise interest rates at some point in the foreseeable future, at least one BOE Monetary Policy Committee member sees the rate hike cycle as “limited and gradual” whenever the process actually begins. Furthermore, an initial rate hike in the UK is not expected until sometime next year. In contrast, the US is expected by many market participants to begin its own monetary tightening cycle likely by the end of this year, after having kept rates unchanged during last week’s Fed meeting.

GBP/USD fell by over 160 pips at one point on Tuesday from its previous perch around the 1.5500 support/resistance level. In the process of this plunge, the currency pair has reached back down to touch its key 200-day moving average, above which it had been trading for the past two weeks.

This bearish turn of events for GBP/USD occurs after the dollar failed to sustain its pullback late last week on news that the Fed would hold interest rates unchanged. The dollar rebounded swiftly and sharply from that very brief setback, placing renewed pressure on both the GBP/USD and EUR/USD.

As UK/US interest rate expectations presently stand, GBP/USD could well have significantly further to fall from its current position. A break below the noted 200-day moving average should push the currency pair back down towards its major 1.5200-area support target, last re-tested just over two weeks ago. Any further downside move should then begin to target the 1.5000 psychological support objective.