Fed rate decision to impact GBP in near term

The second half of August has not been kind to GBP. The GBP TWI is down nearly 3.5% from its mid-month highs with the bulk of the under-performance during this volatile period for markets versus the current account surplus currencies of EUR, JPY and CHF respectively. 

The recent slew of positive M&A news flow has revived GBP sentiment making it one of the best performing currencies month-to-date whilst comments from BoE Governor Carney at Jackson Hole suggest that the debate on the first rate hike will still come into "sharper relief" at the turn of the year. Most analysts look for a dovish slant to the Minutes of the meeting and this may pressure GBP heading into the meeting. 

"However, with the balance of risks skewed towards slightly softer language, this may be setting up GBP for an asymmetric response particularly with the UK rates market now forecasting the first UK rate hike for October 2016. In other words, the Bank of England may have to sound considerably more dovish to materially impact UK rate hike expectations relative to current levels", says Bank of America. 

A 9-0 vote may deliver some knee-jerk weakness but the near-term outlook will be dominated by two major events, the Fed rate decision, and the sustainability of the recovery in global risk outlook. The policy divergence theme is alive and kicking but for GBP, it is becoming increasingly conditional on the reaction function of the Fed for the time being.