GBP/USD Exchange Rate Jumps as Fed Deliver’s ‘Dovish’ 25bps Hike
(Updated 08:30, 02/02/23) The Pound US Dollar (GBP/USD) exchange rate rocketed higher on Wednesday evening, following the Federal Reserve’s latest interest rate decision.
The Fed raised rates by 25bps. This was in line with expectations, but was the bank’s smallest rate increase since March.
While the Fed indicated there are more hikes to come, Fed Chair Jerome Powell accompanying speech proved a little less hawkish than expected. As a result, USD investors continue to price in Fed rate cuts for later this year.
The GBP/USD exchange has since stabilised this morning as GBP investors brace for the Bank of England’s (BoE) own rate decision later this afternoon.
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GBP/USD Exchange Rate Buoyed by Lacklustre ADP Employment Figures
(Updated: 16:15, 01/02/23) The Pound US Dollar (GBP/USD) exchange rate is trading with modest gains this afternoon, the pairing having appreciated roughly 0.2% to strike $1.2332.
This uptick in GBP/USD comes on the back of weak US jobs data. The ADP employment figures reported the US private sector only added 106,000 jobs in January. Down from 253,000 in December and well below the 178,000 forecast.
Payrolls at US companies grew at the slowest pace in two years in January, according to data from ADP Research Institute https://t.co/wI3DOcrCh1
— Bloomberg (@business) February 1, 2023
However, the Federal Reserve’s looming interest rate decision helped to limit the US Dollar’s losses.
While the Pound was buoyed against the US Dollar, it struggled to replicate this success against the rest of its peers this afternoon as ongoing strike concerns sapped Sterling sentiment.
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Pound US Dollar Exchange Rate Steady ahead of Fed Decision
The Pound US Dollar (GBP/USD) exchange rate is trapped in a narrow range so far this morning. USD investors being reluctant to make any aggressive bets ahead of the Federal Reserve’s impending interest rate decision.
At the time of writing the GBP/USD exchange rate is trading at around $1.2316. Virtually unchanged from this morning’s opening levels.
US Dollar (USD) to Surge on Hawkish Fed Rhetoric?
The US Dollar (USD) is flat so far this morning as markets brace for potential volatility in the wake of a key Fed interest rate decision later this evening.
The Fed is widely expected to deliver a 25bps hike today as it concludes its first interest rate decision of the year.
In isolation the 25bps hike might place pressure on the US Dollar. Another moderation in the pace of the Fed rate hikes is likely underpin expectations the bank’s current tightening cycle is nearing an end and that the Fed may start cutting interest rates before the end of 2023.
Fed policymakers have so far been unsuccessful in pushing back against this narrative. Which is why Fed Chair Jerome Powell’s speech will be a key focus today.
Michael Hewson, chief market analyst at CMC Markets UK, comments:
‘[The] disconnect between the Fed’s rhetoric and what the market is pricing which makes today’s FOMC rate decision and Powell press conference very much a “live” meeting.
‘While Fed officials have insisted that rates will stay high for some time to come, the markets simply don’t believe them, especially when several key inflation indicators have shown that prices are still coming down on a steady trajectory.’
If Powell firmly dismisses this rate cut speculation the US Dollar could move sharply higher this evening.
Pound (GBP) Muted amid UK Strike Chaos
The Pound (GBP) is also trading in a limited range this morning amid a mass walkout in the UK.
GBP investors fear millions will face disruption as teachers, rail workers and members of the civil service are all on strike.
The widespread industrial action is likely to place even more pressure on the UK economy at a time when growth is already anaemic.
Pound US Dollar Exchange Rate Forecast: Dovish BoE to Weigh on Sterling?
Looking past the Fed’s rate decision to the second half of the week. The Pound US Dollar exchange rate could be rocked by the Bank of England’s (BoE) own decision.
With a 50bps hike from the bank largely priced in, the BoE’s forward guidance will be drive any subsequent movement.
Any signals that appetite for further hikes continues to wane could see the Pound nosedive.
For USD investors the focus in the latter half of the week will be the latest US non farm payrolls. Will a slowdown in employment growth at the start of 2023 drag the US Dollar lower?