Pound US Dollar (GBP/USD) Exchange Rate Steadies after FOMC Minutes Bring Sharp Rally

Pound US Dollar (GBP/USD) Exchange Rate Rallies as Dovish Fed Pivot Weakens Dollar

The Pound US Dollar (GBP/USD) exchange rate is strengthening this morning, following yesterday’s release of the Federal Open Market Committee (FOMC) meeting minutes.

At the time of writing, GBP/USD is trading at around US$1.208, an increase of roughly 0.2% from the morning’s opening rates. As such, the exchange rate is remaining near a four-month high after an overnight rally.

US Dollar (USD) Readjusts after Overnight Slump

The US Dollar (USD) is trading sideways this morning, following an overnight slump prompted by the Federal Reserve meeting minutes.

Within the meeting, the majority of Fed officials spoke in favour of softer rate hikes in future. In turn, investors ventured to riskier avenues as high interest rate hike bets dissipated.

The minutes stated that:

‘A slower pace would better allow the (Federal Open Market) Committee to assess progress toward its goals of maximum employment and price stability. The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited.’

Fed officials believe that monetary policy had reached a ‘sufficiently restrictive stance’. As such, it seems likely that the Fed will adopt a dovish position, based on the path of inflation over the next months.

The pivot led to the US Dollar sliding against most major peers, but levelling out at the beginning of today’s session. Inflation is still far beyond the Fed’s 2% target, though recent data releases have indicated inflation may have peaked.

Further trade for USD during today’s session will be focused on global developments, as markets are closed for Thanksgiving.

Pound (GBP) Underpinned by Hawkish Speech from Huw Pill

The Pound (GBP) is trading narrowly this morning, as Bank of England (BoE) Chief Economist Huw Pill reasserts further tightening.

Speaking last night, Pill stated that he didn’t anticipate interest rates hitting the currently priced in amounts. But, he did reiterate the need for further tightening to control a spiralling inflation rate.

Pill stated:

‘Given the need to contain the risk of greater inflation persistence implied by potential second round effects, further action is likely to be required to ensure inflation will return sustainably to its 2% target over the medium term.’

As such, the potential for further tightening is underpinning Sterling this morning. However, GBP’s room for gains may be being capped by domestic news.

With strikes across teaching and postal services, discontent surrounds the UK which may be adding further headwinds to Sterling. University staff are taking the largest action in higher education’s history, as 70,000 union members strike over below-inflation pay.

Pound US Dollar (GBP/USD) Exchange Rate Outlook: Market Sentiment in Focus

With economic data scarce for both sides of GBP/USD, investors may be focused on global factors. Risk sentiment may play a key role in shaping the pairing. Should the current risk-on trade continue, GBP/USD may strengthen.

Furthermore, developments with the UK’s domestic struggles may serve to weaken the Pound, should strike action continue. With the UK government aiming to hold talks with union chiefs, any further issues could dent GBP.

John Mulcahey

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