Pound US Dollar (GBP/USD) Refreshes Six-Week High after Fed’s Dovish Hike
(Updated 08:55, 23/3/23) The Pound US Dollar (GBP/USD) exchange rate strengthened overnight after the Federal Reserve’s interest rate decision triggered a selloff in the US Dollar (USD). At the time of writing, GBP/USD is trading at $1.2322, just shy of a six-week high of $1.2344.
Although the US central bank raised rates by 25bps, as expected, it signalled that it may be nearing the end of its tightening cycle. In the accompanying statement, the Fed dropped the reference to ‘ongoing increases’ and instead wrote:
‘The committee anticipates that some additional policy firming may be appropriate’.
In response, markets have pared back their bets on further interest rate rises. Analysts now see a 56% chance that the Fed will leave rates unchanged at its May meeting, versus a 54% of a hike last week.
Attention now turns to the upcoming Bank of England (BoE) decision. The Pound (GBP) could get a similar treatment to the US Dollar, as the BoE is forecast to raise rates by 25bps but could signal that this might be its last hike. If that’s the case, GBP/USD would likely retreat from its current level.
There is also a chance that the bank could keep rates on hold, a move that would likely send Sterling tumbling lower. Whatever the bank chooses to do, the Pound US Dollar pairing could witness volatility.
Original article continues below:
Pound US Dollar (GBP/USD) Exchange Rate Rallies following Hot UK CPI
The Pound US Dollar (GBP/USD) exchange rate touched a fresh six-week high today after an unexpected rise in UK inflation boosted Bank of England (BoE) interest rate rise bets.
At the time of writing, GBP/USD is trading at around $1.2282, up over 0.4% on the day, having briefly hit $1.2297.
Pound (GBP) Leaps on Fresh BoE Bets following UK Inflation Report
The Pound (GBP) jumped this morning after the UK’s consumer price index shocked markets.
Both headline and core inflation unexpectedly increased last month. The former rose from 10.1% to 10.4%, while the latter increased from 5.8% to 6.2%. Economists had expected both readings to decline.
The surprise rise in inflation piles pressure on the Bank of England to raise interest rates once again at its meeting tomorrow. Analysts had been expecting in a pause in the bank’s tightening cycle, but today’s data has reignited bets on another rate rise. Markets now put the odds of a quarter-point increase at 94%, with a 6% chance of a larger half-point hike.
…rate rise tomorrow has strengthened. Indeed, investors are now betting there’s a 94% probability the Bank of England will raise Bank Rate by 0.25%. pic.twitter.com/z1O9GLsUXJ
— Joel Hills (@ITVJoel) March 22, 2023
In response, Sterling jumped, recouping yesterday’s losses against the US Dollar (USD).
US Dollar (USD) Subdued Ahead of Fed
Meanwhile, USD seems muted as markets await the Federal Reserve interest rate decision this evening.
Investors are reluctant to place any aggressive bets ahead of the meeting as the outcome is steeped in uncertainty. US data has come in mixed over the past few weeks and the recent turmoil in the American financial sector could make policymakers nervous about cranking borrowing costs even higher.
The looming decision is keeping the US Dollar subdued today, allowing the Pound to capitalise on renewed BoE bets.
GBP/USD Exchange Rate Forecast: Fed Decision in the Spotlight
Looking ahead, the Federal Reserve decision this evening is in focus. The US central bank is likely to raise interest rates by 25bps, bringing the fed funds rate from 4.75% to 5%.
With such a move broadly expected by markets, the main driver of movement could be the Fed’s tone looking forward. If policymakers sound cautious following the recent turmoil in the US banking sector – including the collapse of two American banks – USD could stumble.
Accompanying the monetary policy decision, the Fed will releases its latest economic and interest rate projections. Any indication that the terminal rate could be lower than previously projected may hurt the ‘Greenback’.
Ahead of the decision, USD may remain rather muted. Risk appetite could affect the safe-haven currency: if markets grow jittery as the Fed decision approaches, the US Dollar may be able claw back some losses.
Meanwhile, the UK’s inflation reading and BoE rate hike bets could continue to determine the Pound’s fortunes today.
UK political headlines could prompt some volatility in Sterling. Former Prime Minister Boris Johnson faces a grilling today from the Commons privileges committee over allegations that he misled Parliament during the Partygate scandal.
In addition, MPs will vote on current PM Rishi Sunak’s Northern Ireland Protocol bill. Politicians from the DUP and some Tory backbenchers have said they will oppose the deal. Signs of political instability could spook GBP investors.