GBP/USD exchange rate trends higher on Fed uncertainty
The pound US dollar (GBP/USD) exchange rate has recovered through today’s session following a dip on Tuesday afternoon. Hawkish comments from Federal Reserve Chairman Jerome Powell supported the US dollar (USD) yesterday following concerns that the central bank is ready to take a more cautious monetary policy stance.
At the time of writing, GBP/USD is trading at $1.2805, incrementally higher than on Tuesday afternoon.
Pound (GBP) firms despite waning tailwinds
The pound (GBP) is managing to climb this afternoon against several of its peers, apparently buoyed by Fed uncertainty and hawkish comments from Bank of England’s (BoE) policymaker Jonathan Haskel.
Haskel is against the UK’s central bank cutting interest rates in August, as has been priced in by markets. The hawkish Monetary Policy Committee (MPC) member remarked:
‘I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably.’
Against the backdrop of a potentially more dovish Federal Reserve, Haskel’s comments inspire confidence that there will be no significant divergence between the monetary policy of the BoE and the Fed. Historically, the Fed has been the more hawkish of the two banks.
Despite Haskel’s comments, however, the UK’s interest rate trajectory is far from certain. Moreover, political tailwinds in the country are starting to wear off following the Labour party’s epic win during last week’s elections.
Annual headline inflation has returned to the Bank of England’s 2% target as per the latest reading, released on 19 June. This puts pressure upon the BoE to consider reducing interest rates regardless of hawkish members’ commentary.
US dollar (USD) tumbles as Fed speech anticipated
The US dollar is weakening against its peers today as mixed comments from Fed Chairman Powell given yesterday continue to weigh upon the currency. While Powell warned against cutting interest rates too soon, he also cautioned that keeping rates higher for longer could have long term repercussions for the economy.
Powell told the Senate Banking Committee: ‘The most recent monthly readings have shown modest further progress. More good data would strengthen our confidence that inflation is moving sustainably toward 2%…
In light of the progress made both in lowering inflation and in cooling the labour market over the past two years, elevated inflation is not the only risk we face.’
With little else to trade upon, the ‘greenback’ struggles to make gains. Additional speeches later during today’s session may have some influence upon USD exchange rates: Powell will speak again at 14:00 UTC, followed by Federal Reserve Governor Michelle Bowman and Fed Chicago President Austan Goolsbee at 18:30.
Into the European evening, Governor Lisa Cook will deliver further comments at the 2024 Australian Conference of Economists.
GBP/USD forecast: exchange rate to firm on increasing bullish sentiment?
This afternoon, GBP/USD could continue to trend upwards amid bold Sterling sentiment. In light of Haskel’s recent hawkish comments, markets are contemplating the Bank of England’s next moves.
Amid multiple speeches from Fed policymakers, the ‘greenback’ may waver further throughout the afternoon and into the evening. Mixed assessments of economic performance from Bowman, Goolsbee and Cook would likely inspire volatility, while a unified hawkish stance could easily boost the US dollar.
Looking to tomorrow, pound traders will be preoccupied with the UK’s latest GDP reading and industrial production data. If the economy indeed expanded in May, as forecast, GBP s likely to climb against its peers.
Meanwhile, an increase in US headline inflation on a monthly basis could trigger US dollar tailwinds. If the Fed perceives the threat of inflation to be significant, it is more likely to maintain restrictive monetary policy – positive for USD investors but negative for other global currencies.