(Updated 16:25 27/01/22)
The Pound US Dollar (GBP/USD) has continued to fall today owing to a strong US Dollar (USD). Higher than forecast fourth quarter GDP growth figures helped push USD further up over the course of the day.
At time of writing the GBP/USD exchange rate is at around $1.3394, close to -0.5% down from this morning’s opening figures.
Pound US Dollar (GBP/USD) Exchange Rate Drops as Fed Signals Possible March Rate Hike
The Pound US Dollar (GBP/USD) exchange rate fell overnight following the US Federal Reserve’s interest rate decision, but has ticked upward slightly following the opening of the European markets.
At time of writing the GBP/USD exchange rate is at around $1.3429, roughly -0.3% down from this morning’s opening figures.
US Dollar (USD) Climbs as Fed Chair Powell Seeks to Combat Soaring Inflation
The US Dollar (USD) has continued to climb against its rival currencies today following the US Federal Reserve’s interest rate decision on Wednesday evening. A risk-off market mood has also seen investors flock to the safe-haven ‘Greenback’.
Fed Chair Jerome Powell struck a particularly hawkish tone on Wednesday evening as he indicated that an interest rate hike by the central bank was likely to happen in March. Powell also confirmed a tightening of monetary policy in order to combat soaring inflation as well as an end to the Fed’s bond buying programme this month.
The Fed is set to closely monitor how quickly inflation falls back to their 2% target with the pace of future rate hikes and reduction of their balance sheet still undecided. Powell was quick to confirm however that with inflation currently high and set to get worse through 2022, the central bank would be bring its Covid-era support to an end.
Michael Feroli, chief US economist at JPMorgan, summarised the reaction from the market quite succinctly:
‘No more Mr Nice Guy.’
Pound (GBP) Buoyed as UK Eases Covid Restrictions
The Pound has climbed against many of its competitors amid a strong risk-averse trading environment, although has fallen against a strong US Dollar (USD). Domestic and international political headwinds may limit upward movement for Sterling however.
GBP may be buoyed today as the UK’s final Covid-19 restrictions come to an end. As of 27 January work from home guidance has come to an end, mask use is no longer mandated, and Covid passes are no longer required for entry.
Whilst many government ministers have celebrated the move, experts have warned that focus on disease management rather than infection control may place additional pressure on an already overburdened health system.
Sterling is likely to continue to see headwinds from within the UK’s political sphere as the ‘Partygate’ scandal rumbles on. The hotly anticipated report into alleged illegal gatherings at 10 Downing Street was expected this week but government sources have indicated that publication of the document could be pushed to next week.
Negotiations over the Northern Ireland Protocol are also likely to generate headwind for the Pound following heated rhetoric from the UK. On Wednesday PM Boris Johnson characterised the EU’s implementation of the protocol as ‘insane and pettifogging’. Chief EU negotiator Maroš Šefčovič had less dramatic terms for the UK’s position, but described the process to EU member states as ‘difficult and frustrating’.
GBP/USD Exchange Rate Forecast: Will Positive Day for USD Continue?
Looking to the rest of the week for the Pound, January’s distribute trades figures due later on Thursday are forecast to rise as the UK’s retail sector recovers this month.
Following the Fed’s meeting, fourth quarter GDP growth figures are forecast to rise which could help push the US Dollar even higher. Friday’s expected drop to personal spending in December could limit gains for USD however.