US dollar slumps following dovish Fed rate hike

The US dollar tumbled on Wednesday in response to the Federal Reserve’s latest interest rate decision.

Meanwhile, trade in the pound is mixed so far this morning, with GBP/EUR muted at €1.1661 and GBP/USD ticking up to $1.2961. GBP/CAD is rangebound at CA$1.7079, while GBP/AUD and GBP/NZD slide AU$1.9051 and NZ$2.0741, respectively.

Looking ahead, will the European Central Bank’s (ECB) interest rate decision inject similar volatility into the euro today?

What’s been happening?

The US dollar held in a narrow range through yesterday’s European trading session as markets braced for the Federal Reserve’s latest interest rate decision.

As was widely expected the Fed raised rates by 25bps.

USD exchange rates then slumped in response to comments made by Fed Chair Jerome Powell in his accompanying press conference. Powell struck a more dovish chord than markets had been expecting as he declined to commit to a September hike.

The euro, meanwhile, was trapped in a narrow range on Wednesday as EUR investors were reluctant to make any aggressive bets ahead of the European Central Bank’s (ECB) own interest rate decision later today.

At the same time, the pound was mostly rangebound yesterday as a lull in UK economic data left the currency without a strong directional bias.

What’s coming up?

The ECB is set to deliver its own interest rate decision later this afternoon. Like the Fed, the ECB is widely expected to raise interest rates by another 25bps this month.

As the hike has been well telegraphed by the ECB it has already been priced in by EUR investors. As a result, any subsequent movement in the euro is likely to be driven by the bank’s outlook on policy.

If the recent slowdown in Eurozone inflation leaves the ECB non-committal regarding future rate hikes, this could trigger a sharp drop in the euro.

Across the Atlantic the spotlight will be on the latest US GDP figures. US economic growth is forecast to have slowed in the second quarter. Could this spook markets and propel the US dollar higher?

In the meantime, will a positive reading for the Confederation of British Industry’s (CBI) latest distributive trades index buoy the pound this morning?