Pound US Dollar Exchange Rate Pressured as Fed Prompts Cautious Trade

Pound US Dollar (GBP/USD) Exchange Rate Slips on Hawkish Fed

The Pound US Dollar (GBP/USD) exchange rate is under pressure on Thursday but continues to hold above $1.35.

The US Dollar has received support from the release the Federal Open Market Committee (FOMC) minutes from its latest policy meeting, and the resulting risk-off market trade that has increased safe-haven demand for USD.

US Dollar (USD) Bolstered by Hawkish Fed Minutes

The US Dollar (USD) firmed last night following the release of the FOMC minutes from its December policy meeting, and has continued to benefit from the Fed’s hawkish tone today.

The minutes indicated that the Federal Reserve may raise interest rates sooner-than-expected, and signalled quantitative tightening through reducing its asset holdings to bring down high inflation.

The minutes said:

“Participants generally noted that, given their individual outlooks for the economy, the labour market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated. Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate.”

Following the publication of the minutes, market sentiment turned cautious and US Treasury yields rose to their highest level since April 2021 as investors reacted to the prospect of the Federal Reserve removing stimulus more aggressively than previously anticipated.

Higher yields and risk-off trade in turn supported demand for the US Dollar.

Meanwhile, mixed US data releases have stoked additional volatility in USD exchange rates.

The ISM non-manufacturing PMI for December unexpectedly came in with a reading of 62, well below forecast of 66.9 and a sharp drop on November’s 69.1.

The figure indicates the slowest growth in service sector activity in three months as US businesses struggle with inflationary pressure, staff shortages, and supply chain disruption.

At the same time, US factory orders for November revealed an increase of 1.6%, up on the previous month’s 1.2%.

Pound (GBP) Struggles as Services PMI Confirms Slowdown

The Pound (GBP) has struggled for support during Thursday’s session after the finalised UK services PMI for December confirmed a sharp slowdown in the sector.

Despite coming in slightly higher than forecast, the reading of 53.6 confirmed a significant drop from November’s 58.5.

The data shows business activity growth hit a 10-month low as Omicron fears in the UK hit the hospitality, travel and retail industries.

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said:

“Uncertainty and volatility in the services sector returned at the end of last year with a sudden drop in demand and overall activity growth was the lowest since February 2021.

“This not unexpected turn of events was the direct result of increased pandemic restrictions as the number of festive activities were reduced by covid-concerned consumers.

“Ongoing Brexit customs delays and supply shortages also added to depressed activity in the sector. Exports orders were also affected by reduced international travel with sales falling for the first time since June 2021.”

Pound US Dollar Forecast: US Non Farm Payrolls in Focus

The Pound US Dollar exchange rate may suffer further losses by the end of this week as investors focus on December’s US non farm payrolls release.

With forecasts pointing to a strong 400,000 jobs added to the US economy last month, the US Dollar may strengthen, particularly as a high reading may provide further evidence for the Federal Reserve to pursue an aggressive tightening of monetary policy.

Meanwhile, in the absence of notable UK data releases the Pound could end the week lacking significant direction.

However, more data on rising hospitalisations and pressure on UK businesses through staff absences could cause concerns over UK economic activity which may weigh on Sterling sentiment.

Andrew Roberts

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