GBP/USD slid less than 50 pips following as expected Fed hike and upgrades to growth forecasts

• GBP/USD dropped to new one-week low versus euro on the Italy vibe which was a drag on cable, trading between 1.2641-1.2679, but today's FOMC has sent the dollar a touch higher on a relatively benign outcome for markets, much in line with expectations.
• Below 1.2477 targets the 78.6% retracement at 1.2109.

The FOMC's decision was unanimous, hiking rates by 25 basis points to 2.25% - 2.50%, repeating in the statement that risks to the economy appear 'roughly balanced' and will "continue to monitor economic and financial conditions for their effects on the economic outlook."

• Federal Reserve's FOMC statement - Dec. 19 - full text
• FOMC raises the target for fed funds rate by 25bp to 2.25% - 2.5%

However, there is a slight bid in the greenback as the Fed forecast two hikes in 2019 which is still above where the market was priced, and they continue to forecast gradual rate hikes - There was also a boost to growth forecasts while inflation forecasts were unchanged - (DXY rallied from 96.61 to a high of 96.96).

GDP forecasts:

• 2018 3.0% vs 3.1%
• 2019 2.3% vs 2.5% prior
• 2020 2.0% vs 1.8% prior

Inflation:

• 2018 1.9% vs 2.0% prior
• 2019 2.0 vs 2.1% prior
• 2020 2.0% vs 2.1% prior

Ahead of the FOMC announcement, the agreement between Rome and Brussels on Italy’s budget deficit helped to support risk assets while dovish expectations from the FOMC helped to encourage risk appetite, (the FTSE 100 was up 1.0% at the close). As for domestic data, the UK November CPI was in line with expectations at 2.3% y/y with core rising 1.8% y/y. Headline inflation dropped to its lowest level in 20 months, dented by a sharp fall in oil prices. Core inflation is stable just below target despite firmer wage growth. "There is nothing in the data to suggest the BoE will need to raise interest rates in the near future," analysts at ANZ Bank argued.

As for other US data, US current account deficit was in line with expectations in Q3 at USD124.8bn (2.4% of GDP), up from USD101.2bn (2% of GDP) in Q2 while existing home sales rose 1.9% m/m, versus expectations of a 0.4% drop.

GBP/USD levels

Analysts at Commerzbank explained that GBP/USD’s recent move to 1.2479/77 was not confirmed by the daily RSI: "While rallies remain capped by the 20-day ma at 1.2706 we will regard the market as vulnerable on the downside. Below 1.2477 targets the 78.6% retracement at 1.2109. Above the 20 day ma lies the 1.2840 current December high but while capped by the resistance line at 1.2928 it will remain offered."