Pound US Dollar (GBP/USD) Exchange Rate Spikes and Slumps as Fed Chair Signals Further Rate Rises
(Updated 16:30, 26/8/22) The Pound US Dollar (GBP/USD) exchange rate has seen some volatile trade today, ultimately heading lower as Federal Reserve Chair Jerome Powell said the US central bank will continue raising interest rates ‘forcefully’.
Before Powell’s highly anticipated speech at the Jackson Hole Economic Symposium, GBP/USD had recovered earlier losses. The US core PCE price index – the Fed’s preferred measure of inflation – fell more than forecast, dropping from 4.8% to 4.6% on an annual basis, versus expectations of 4.7%. In addition, US personal income and spending growth missed market forecasts, indicating a slowing US economy.
These data releases seemed to dent the US Dollar (USD), as a weaker American economy may trigger some caution among Fed policymakers.
However, during his speech Powell reiterated the Fed’s commitment to bringing inflation. While he indicated that the pace of tightening may slow, he added that the neutral estimate for the Fed funds rate of 2.25-2.50% is ‘not a place to stop or pause’. He also said the Fed would likely need to maintain restrictive interest rate levels for ‘some time’.
Both hawkish and cautious, Powell’s comments failed to prompt a significant upside in the US Dollar. However, they did see USD recoup earlier losses against the Pound (GBP).
In addition, the latest US consumer confidence report massively exceeded forecasts, adding to USD’s gains.
Meanwhile, energy crisis fears in the UK maintained pressure on the Pound. As the country heads towards a recession, surging energy bills threaten to further damage the UK economy. The current caretaker government has refused to announce support plans before a new leader is elected. This is despite calls from economists, industry leaders and charities for urgent and decisive action.
At the time of writing, GBP/USD is trading at $1.1763 and falling. This is down from today’s opening level of around $1.18 and today’s high of $1.1878.
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Pound US Dollar (GBP/USD) Exchange Rate Rocky as Energy Price Cap Rises
The Pound US Dollar (GBP/USD) exchange rate initially headed lower this morning as Ofgem officially announced the new energy price cap, adding to fears over the UK’s energy crisis. However, a downside in the US Dollar (USD) helped GBP/USD recoup some losses.
At the time of writing, GBP/USD is trading at $1.1831, having bounced off lows of $1.1773.
Pound (GBP) Initially Stumbles as Energy Crisis Intensifies
The Pound (GBP) was on the defensive this morning as Ofgem’s energy price cap rose an unprecedented 80%, intensifying fears around the UK’s cost-of-living crisis.
From 1 October, the price cap will rise from £1,971 to £3,549 per year, potentially pushing many UK households into fuel poverty.
Ofgem also warned that, with energy costs continuing to rise, ‘prices could get significantly worse through 2023’.
ScottishPower CEO Keith Anderson, who has urged the government to spend £100bn to freeze energy bills, says:
‘The size and scale of this issue is truly catastrophic for UK households and that’s why only a big solution can tackle it once and for all to shelter people from the worst this winter.’
The predicted severity and length of the UK’s energy crisis weighed on Sterling today, with the country’s outlook bleaker than ever.
However, hopes that the UK government may intervene could be limiting the downside. Chancellor Nadhim Zahawi said he is ‘working flat out’ on a support plan, while Tory leadership frontrunner Liz Truss has promised ‘immediate support’ if she becomes Prime Minister.
US Dollar (USD) Fluctuates ahead of Fed Powell Speech
Meanwhile, the US Dollar (USD) wavering as investors look ahead to Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Symposium this afternoon.
Markets expect Powell to strike a hawkish tone, arguing that continued aggressive rate rises are necessary despite signs that the US economy may be slowing. However, there’s a chance that Powell could sound more cautious than anticipated.
As the event has the potential to push the US Dollar either way, USD investors seem reluctant to place any aggressive bets. In response, GBP/USD has fluctuated this morning.
GBP/USD Exchange Rate Forecast: Fed Chair Speech in Focus
Looking ahead, Powell’s speech is certainly the focus for USD investors. As mentioned, hawkish rhetoric from the Fed chief could significant boost the ‘Greenback’, and GBP/USD could slide.
Before then we have the latest US core PCE price index – the Fed’s preferred measure of inflation. Economists expect it to confirm that inflation is easing in the US. Any surprises could affect USD, otherwise investors may remain focused on Powell’s speech.
As for the Pound, it could remain under pressure as warnings from economists, industry leaders and charities continue to pour in. People are calling on the UK government to act now to avert a catastrophic shock in the winter. If the government is able to soothe fears somewhat then this could limit Sterling’s losses.