Pound US Dollar (GBP/USD) exchange rate hits weekly low amid hawkish Fed tilt

Pound US Dollar (GBP/USD) slumps following Fed interest rate decision

The Pound US Dollar (GBP/USD) exchange rate is weakening this morning following the Federal Reserve’s surprise pushback on a March interest rate cut.

At the time of writing the GBP/USD exchange rate is trading at around $1.2653, down approximately 0.3% from this morning’s opening rate.

US Dollar (USD) soars on hawkish Fed hold

The US Dollar (USD) is strengthening this morning as yesterday’s hawkish wins continue to bolster the ‘Greenback’.

While the Federal Reserve delivered a widely anticipated hold on interest rates last night, keeping them at 5.5% for a fourth consecutive time, policymakers struck an unexpectedly hawkish tone during an accompanying press conference.

Despite firmly rooted market beliefs that the central bank was due to begin loosening monetary policy during the first quarter, senior rate-setters negated this narrative yesterday.

Fed Chair Jerome Powell said:

‘Inflation is still too high. Ongoing progress in bringing it down is not assured. I will tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March is the time to do [rate cuts].’

While Powell offered no indication as to when the Fed may begin to ease monetary policy, suggestion of keeping rates higher for longer saw the odds of near-term rate cuts fall to 46%, according to the CME FedWatch Tool. This may continue to boost USD ahead of highly impactful data releases this afternoon.

Pound (GBP) rangebound ahead of BoE rate decision

The Pound (GBP) is facing headwinds ahead of the latest Bank of England (BoE) monetary policy update this afternoon.

With UK data in short supply this morning, investors remain reluctant to place any aggressive bets on Sterling ahead of the central bank’s first interest rate decision of 2024.

April LaRusse, Head of Investment Specialists at Insight Investment, notes that markets will be keen to hear policymaker’s forward guidance, following a suspected rate hold:

‘We don’t expect any change in UK rates tomorrow, but the vote is going to be fascinating. With inflation now considerably below the Banks own forecasts we expect a shift in tone – but the Bank is going to face a tricky job to keep market perceptions on a realistic path.’

Pound US Dollar exchange rate forecast: hawkish BoE hold to lift GBP?

Looking ahead, the Bank of England is due to deliver its latest interest rate decision this afternoon. Should the BoE enact a widely anticipated hold on interest rates, keeping them at 5.25% for a fourth consecutive time, this may inject little volatility into GBP exchange rates later today.

However, the BoE’s accompanying monetary policy report may boost Sterling sentiment, should policymakers continue to push back against May rate cuts.

In the US, the latest ISM manufacturing PMI is due for release later today. Economists expect the manufacturing sector to have contracted in January, with the index dropping to 47, down from December’s reading of 47.4. This could see USD retreat from yesterday’s hawkish wins.

Initial jobless claims for the week ending 27 January are also due out this afternoon. Economists expect to see a minor decrease in the number of new US citizens claiming unemployment benefits, falling to 212,000.

Following the previous week’s unexpected surge in numbers, this could serve to quell concerns of a loosening labour market, lending USD some support.

Yasmine Arasteh

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