The Pound to US Dollar exchange rate succumbed to a fresh five-week low last week as a hawkish hold from the Federal Reserve was enough to prop-up the ‘Greenback’.
Fed Rate Speculation Drives Demand
GBP/USD weakened by around half a cent at the beginning of last week’s session on concerns that the Federal Reserve was going to hike interest rates in September.
However, on Wednesday evening, when the central bank announced its policy plans, rates were left on hold at 0.25%. Chief policymaker Janet Yellen noted that the domestic economy was performing well, with strong growth, sturdy labour market gains and a decent chance of inflation rising to the 2.0% target in the medium term. Yellen suggested that rates would be hiked before the end of the year but revealed that seven out of the 10-person team had concluded to wait until further evidence of progress before acting.
Seeing as the November Fed meeting takes place just days before the US Presidential election, the majority of market players now expect the US central bank to hike rates 25 basis points in December, just as they did in 2016.
Sterling actually rallied by around 150 pips following the Fed announcement – helped by comments from Bank of England (BoE) policymaker Kristin Forbes signalling that the UK economy was performing better-than-expected following the shock of ‘Brexit’.
‘Cable’ Slides To 5-Week Low
However, the reality of the hawkish hold kicked in on Friday – the initial risk-on rally related to the Fed’s decision not to hike wore off – and ‘Cable’ plunged below 1.30 to strike a new five-week low. Demand for the Pound was hurt by some combative comments from UK foreign secretary Boris Johnson, which analysts feared could mean that British officials do not plan on retaining access to the single market following the eventual EU exit.
Pound Sterling to US Dollar Forecast; GBP to Hit Fresh 30-Year Low in Week Ahead?
GBP/USD is now just over a cent above the three-decade low that it hit when the BoE announced its plans to slash interest rates and resume QE at the beginning of August. The potential for further dips remains strong, so long as Fed policymakers retain a hawkish outlook and traders remain anxious regarding the UK’s post-‘Brexit’ trade deal with the European Union.
The fear of a so-called ‘hard Brexit’, whereby Britain loses access to the single market in order to rein-in immigration, is currently working against the Pound. There is little fresh UK data due this week so GBP/USD trading patterns could be dictated by sentiment rather than hard figures.