Prospect of Further Fed Easing Sends the Pound US Dollar (GBP/USD) Exchange Rate Higher

Pound Sterling US Dollar (GBP/USD) Exchange Rate Rises on Fed Rate Cuts

Pound Sterling US Dollar (GBP/USD) exchange rate edged slightly higher on Thursday, leaving the pairing trading at around $1.2927.

The US Dollar struggled to make gains today due to the prospect of further easing from the Federal Reserve.

While strong US services data showed the activity jumped to a one-year high, GBP continued to make gains.

According to head of FX strategy at National Australia Bank, Ray Attrill:

‘The ongoing decline in US yields and the rise in volatility is continuing to cause a position squeeze.

‘Assuming that the Fed is going to enact several more rate cuts in the next month or two – including out of the 17-18 March meeting, then for the short term at least there is some further weakness in the US Dollar to play out.’

Tuesday’s emergency rate cut from the Fed continued to weigh on the Dollar, although former Vice President Joe Biden’s strong performance allowed USD to firm overnight.

The increase in risk appetite pulled investors away from the safe-haven Japanese Yen (JPY). USD/JPY had previously slumped to a five-month low.

Sterling (GBP) Rises as BoE Rate Cut Expectations Decrease

The Pound was able to make some gains after expectations the Bank of England (BoE) would follow the Fed decreased.

The BoE’s incoming Governor, Andrew Bailey said that action would be needed to fight the economic effects of the coronavirus outbreak.

Following the Fed’s surprise rate cut, markets largely expected the BoE would follow suit. However, Bailey said that any easing measures should be done in conjunction with the UK government.

Commenting on this, Jane Foley, Rabobank senior FX strategist said:

‘There were rumours earlier on that the BoE could cut rates today, but that hasn’t happened. That has been an element [in the moves].’

However, Sterling gains were limited as markets have priced in a rate cut by the bank’s 26 March meeting.

Head of G10 currency strategy at CIBC Capital Markets, Jeremy Stretch noted:

‘Certainly the market is priced for a 25 bps cut at the March meeting, so the market is anticipating the BoE will use up its arsenal.’

Added to this, investment bank Goldman Sachs warned Covid-19 will send the UK to the ‘brink of recession’.

In a research note, Goldman Sachs warned:

‘The UK is highly exposed to global activity (which we expect to contract in Q1), tourism exports are significant and the virus is spreading steadily within the UK.’

Pound US Dollar Outlook: US Non-Farm Payrolls in Focus

Looking ahead , the US Dollar (USD) could extend its losses against the Pound (GBP) following the release of US factory orders data.

If January’s factory orders slump further than expected, the ‘Greenback’ will slide.

Meanwhile, investors are going to be focused on Friday’s release of US non-farm payrolls.

If February’s data reveals the US did not add as many jobs to the economy as expected, the Pound US Dollar (GBP/USD) will edge higher.

 

Millie Empson

Contact Millie Empson


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