Pound US Dollar (GBP/USD) Exchange Rate Wavers amid Dovish Fed
(Updated 4/5/23, 16:30)
The Pound US Dollar (GBP/USD) exchange rate is trading erratically as a dovish Federal Reserve looks set to end its tightening cycle. Meanwhile, both the European Central Bank (ECB) and the Bank of England (BoE) look set to continue their respective tightening cycles.
Higher-than-expected initial jobless claims also weighed on the ‘Greenback’. The number filing for unemployment increased by 242K, against a predicted 240K, highlighting a cooling labour market.
At time of writing, the GBP/USD exchange rate is around $1.2567, relatively unchanged from the morning’s opening levels.
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GBP/USD Exchange Rate Fluctuates as Fed Tones Down Hawkish Rhetoric
The Pound US Dollar exchange rate is trading narrowly after the Federal Reserve met expectations and raised the interest rate by 25bps.
At time of writing, the GBP/USD exchange rate is around $1.2566, relatively unchanged from the morning’s opening levels.
US Dollar (USD) Muted as Hiking Cycle Comes to an End
The US Dollar (USD) is struggling for demand this morning in the wake of the Fed opting to raise the interest rates to a range of 5%-5.25% as expected. The move marked the tenth consecutive increase and sees borrowing costs at the highest level since September 2007.
However, the ‘Greenback’ soon lost its footing and plummeted as the central bank also signalled that the current tightening cycle is over. The statement that accompanied the decision omitted the regular wording of the need for further policy firming. Defending the move to raise the interest rates to a 16-year high, Fed Chair Jerome Powell insisted the US banking system was ‘sound and resilient’, and added:
‘Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The committee remains highly attentive to inflation risks.’
Further concerning to USD investors is the mounting evidence that the US economy is finally cooling. With manufacturing falling to a three-year low in March, consumer spending has drastically been cut back, and the banking crisis sending shockwaves, the ‘Greenback’ could remain under pressure.
Pound (GBP) Propped up by Solid Service Sector Growth
Meanwhile, the Pound (GBP) also struggled for demand against its peers this morning despite the service sector expanding by the highest level in over a year.
Final service PMI printed at 55.9, far above expectations of 52.9, and above preliminary estimates. The final reading also showed new orders reached a 14-month high, as well as strong job creation in April. The latest service sector PMIs revealed the fastest rise in business activity in more than a year, and demand conditions continue to improve.
Tim Moore, Economics Director at S&P Global, said of the data:
‘A strong rate of service sector growth meant that the UK economy started the second quarter of 2023 in positive fashion. Overall private sector output expanded at the fastest pace for one year, despite another fall in manufacturing production during April.
‘While the growth outlook has improved considerably for the service economy this spring, a swift rebound in customer demand appears to have reignited inflationary pressures.’
Pound US Dollar Exchange Rate Forecast: ECB Rate Decision to Weigh on the Greenback?
Looking ahead, the Pound US Dollar exchange rate could see movement when the European Central Bank (ECB) reveals their interest rate decision later today. With market forecasts predicting either a 25bps or an outside chance of a 50bps hike, the latter could send the US Dollar lower.
Meanwhile, the Pound will be left alone to market sentiment as the main driver of movement amid a lack of economic data.