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US dollar stumbles as Fed reins in rate hike expectations

currency-newsUS dollar stumbles as Fed reins in rate hike expectations
The US dollar slumped on Wednesday as the Federal Reserve’s forward guidance proved to be less hawkish than expected.

Meanwhile, the pound is struggling to attract support this morning, with GBP/EUR muted at €1.1635 and GBP/USD sliding to $1.2123. GBP/CAD is rangebound at C$1.5660, while GBP/AUD and GBP/NZD hold steady at AU$1.7354 and NZ$1.9340, respectively.

Coming up, will a modest interest rate hike from the Bank of England (BoE) place pressure on Sterling later this afternoon?


What’s been happening?

The US dollar fell back yesterday in the wake of the Federal Reserve’s latest interest rate decision.

While the bank raised interest rates by 75bps, USD exchange rates sank as Fed Chair Jerome Powell made the case for more modest tightening in the future, downplaying the chances of a 100bps hike.

This extended the US dollar’s initial losses on Wednesday, which came in response to falling US Treasury yields and a weaker-than-expected US retail sales print.

The euro initially strengthened on Wednesday, as the European Central Bank (ECB) held an unscheduled meeting to discuss concerns over fragmentation in the bond market.

But these gains didn’t last for long, with EUR investors ultimately underwhelmed by the lack of concrete plans to address the issue.

GBP exchange rates trended higher through yesterday’s European trading session as the currency’s recent slump made it an attractive prospect to more price conscious investors.


What’s coming up?

The Bank of England’s impending interest rate decision will undoubtedly be the focus for markets today.

The BoE is widely expected to deliver another 25bps rate hike this afternoon. However in the face of the Fed’s 75bps hike and with UK inflation running rampant, the modest hike may be viewed as inadequate by GBP investors.

Any resulting downside in the pound could be accentuated if the bank’s forward guidance is also cautious in tone.

In the meantime, EUR investors may look to speeches by ECB policymakers Fabio Panetta and Luis de Guindos for fresh impetus.

In the absence of any high-impact US data, the fallout from the Fed’s rate decision is likely to remain the primary catalyst of movement for the US dollar.
Philip McHugh

Philip McHugh

Joining the corporate trading desk in 2007, Phil now over sees all of Currencies Direct’s corporate dealing activity. Having gained experience working with hundreds of businesses to optimise international payments processes and execute comprehensive risk management strategies, Phil currently works with a portfolio of corporate clients whilst managing Currencies Direct’s overall market exposure

Phil has FCA approval and has completed the Certificate in International Treasury Management (CertiTM)

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