Pound US Dollar Exchange Rate Fluctuates as Fed Leaves Rates Unchanged
The Pound US Dollar (GBP/USD) exchange rate is trading narrowly after the Federal Reserve opted to keep the interest rate unchanged.
At time of writing the GBP/USD exchange rate is trading around $1.2662, relatively unchanged from this morning’s opening levels.
US Dollar (USD) Supported by Further Rate Hikes
The US Dollar (USD) is remaining fairly supported this morning despite a pause in the Fed’s aggressive rate hike cycle. In line with expectations, the Fed opted to leave its policy rate unchanged at 5.25%.
However, keeping the ‘Greenback’ moderately supported was the central bank’s forward guidance. Although Fed Chair Jerome Powell fell short of committing to a rate hike in July, he did explain that holding the rate will give them time to assess current conditions. Further bolstering expectations for a resumption in hiking was the terminal rate projection for end of 2023 was revised higher to 5.6%. The implications of two further hikes buoyed USD investors.
However, limiting any further gains is the upbeat market mood. News out of China lifted spirits as a cut in the one-year funding rate was seen as the first of further stimulus measures. With the world’s second-largest economy stuttering in its post-Covid recovery, Beijing now looks set to provide welcomes boosts to the economy. A buoyant risk sentiment could see safe-haven flows stemmed, denting the ‘Greenback’.
Pound (GBP) Underpinned by Elevated Rate Hike Bets
Meanwhile, the Pound (GBP) is relatively quiet this morning amid a lack of economic data. Sterling remains supported with the prospect of the Bank of England (BoE) raising the interest rate for a 13th consecutive time.
Expectations of the terminal rate reaching 5.75% by the end of the year could be keeping GBP investors buoyed. Yesterday, Chancellor Jeremy Hunt conceded that the UK ‘has no alternative’ to keep raising interest rates. Sushil Wadhwani, former member of the BoE’s monetary policy committee, warned of the dangers of not controlling inflation:
‘Inflation ultimately is the enemy of growth. It’s very important for us to get inflation down if you want sustainable growth.
‘In that sense it’s important to continue administering the medicine, in the form of higher interest rates, notwithstanding the side-effects. Because if we delay raising rates then we might find the disease gets worse. We might then find that we have to do even more and experience even worse side effects.’
Pound US Dollar Forecast: Further Clues on How Long Fed Pause will Last?
Looking ahead, the Pound US Dollar exchange rate could see further movement on any hints on how long the Fed’s pause will last. US Retail sales are expected to decline modestly by 0.1%, but sales volumes are expected to remain strong. Elsewhere, initial jobless claims could signal easing labour market pressures, which could weigh on the ‘Greenback’.
Meanwhile, the Pound could be left trading on market sentiment and elevated interest rate hike bets. Without any major economic data for the rest of the week, Sterling could be left clinging to modest gains.