May 25, 2023 – Written by John Cameron
STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Narrows amid Growing Fed Caution
Pound US Dollar (GBP/USD) Exchange Rate Narrows amid Growing Fed Caution
The Pound US Dollar (GBP/USD) exchange rate traded narrowly on Thursday, as USD investors pared back bets on further tightening.
At the time of writing, GBP/USD traded at around US$ 1.2371, showing little signs of movement from Thursday’s opening rates.
US Dollar (USD) Muted amid Growing Fed Caution
The US Dollar (USD) saw muted trade on Thursday, as markets continued to digest Wednesday’s Federal Open Market Committee (FOMC) meeting minutes.
These minutes indicated that the Federal Reserve were growing increasingly split on the potential for further interest rate hikes, and indicated that a pause in their current tightening cycle may be imminent.
The minutes stated that: ‘Participants generally agreed that in light of the lagged effects of cumulative tightening in monetary policy and the potential effects on the economy of a further tightening in credit conditions, the extent to which additional increases in the target range may be appropriate after this meeting had become less certain. Participants generally expressed uncertainty about how much more policy tightening may be appropriate. Many participants focused on the need to retain optionality after this meeting.’
As such, USD investors began to adjust their bets on additional rate hikes, which appeared to weigh on the US Dollar during the European session.
However, the ‘Greenback’ may have been cushioned by continuing anxieties over the US debt ceiling negotiations. While the negotiations have been seen as positive and continuing well, a hard deadline of 1st June is rapidly approaching.
If the US were to default on its debts, it would have a potentially catastrophic impact on the US economy, and the global economy at large. Counterintuitively, this likely brought safe haven flows to the ‘Greenback’ during Thursday’s session.
Pound (GBP) Underpinned by BoE Rate Hike Bets
The Pound (GBP) was underpinned on Thursday by elevated interest rate hike bets. Following on from Wednesday’s surprise core inflation print, markets have all but priced in an additional hike in June.
From here, markets appeared to have entertained further interest rate hikes, with pressure mounted on the Bank of England (BoE).
Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING, commented: ‘We’ll definitely have to see some softer wage/price data over the coming weeks for the Bank of England to be diverted from what looks like another 25bp hike on June 22nd.’
However, Sterling may have been capped on Thursday by a lack of impactful macroeconomic data releases. This thin data calendar likely prompted investors to consider wider market dynamics.
With a sour market mood colouring the European session, the increasingly risk sensitive Pound may have been unable to gain much ground.
Pound US Dollar (GBP/USD) Exchange Rate Forecast: US Core PCE Data in Spotlight
Looking ahead for the US Dollar (USD), the core catalyst of movement is likely to be the latest core PCE price index data.
This data is the Federal Reserve’s preferred gauge of inflation, and is influential in shaping the course of further interest rate hikes. On the back of the recent mixed Federal Open Market Committee meeting minutes, this data is likely to be vital in shaping future hikes.
Currently, economists forecast that the index will hold at 4.6% in April. By showing little change, this could show that inflation is stickier than expected and risks becoming embedded, which would potentially force the Fed to hike rates further.
Elsewhere, any further developments in the US debt ceiling negotiations may impact the ‘Greenback’. The so called ‘X Day’ is fast approaching, and it may lead to increased anxieties across the markets. If true, the souring mood could bring safe haven flows to USD.
For the Pound (GBP), the latest retail sales data is due to print on Friday. An improvement of 0.3% is forecast by economists, which could bring cheer to GBP investors by indicating a recovery in the vital UK sector.
Like this piece? Please share with your friends and colleagues:
International Money Transfer? Ask our resident FX expert a money transfer question or try John’s new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.
TAGS: Pound Dollar Forecasts