US Fed Sends GBP/USD Rate to Best Level Since mid-September

The US Dollar continues to bleed value on global foreign exchange markets with fresh slippage coming in the wake of the US Federal Reserve’s July policy meeting and subsequent briefing.

No changes to policy were announced at the meeting and market focus was always going to be on the nuances contained in the accompanying statement.

The accompanying statement expressed more concern about the recent softness in US inflation levels which was immediately taken to mean that the Fed might be looking to slow the pace at which it raises interest rates.

For the Dollar to rally, the opposite scenario would need to have played out.

"The Dollar sold off heavily following yesterday’s FOMC meeting. While the Fed signalled balance sheet normalisation starting 'relatively soon', the key focus was on the Fed’s take on the US inflation," says Chris Turner, an analyst with ING Bank N.V.

“It suggests that the next rate rise is likely to be delayed until the year-end at the earliest,” adds Lloyds Bank in a briefing to their commercial banking clients.

The Pound to Dollar exchange rate has moved above 1.31 since the event and now gives the best rate of exchange for those looking to conduct international payments since September 16, 2016.

If we look at the rates being offered by currency payment providers, we note the most competitive providers are now offering levels above 1.30; a huge landmark in Sterling’s post-Brexit vote recovery.

The climb higher in GBP/USD almost has everything to do with the ongoing weakness in the Dollar complex.

Over the course of the past month the Dollar is the worst-performing major currency, and if we dig deeper into the top-20 currency complex it is only the Turkish Lira and Indonesian Rupee (by a small margin) that are doing worse. 

The currency is down 2.46% against the Euro and nearly 1.0% against the Pound.

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Federal Reserve Unlikely to Pursue Aggressive Rate Hike Policy

The U.S. dollar sold off aggressively in the hour after the monetary policy announcement with USD/JPY dropping 100 pips, EUR/USD hitting a 2 year high, GBP/USD breaking 1.31, AUDUSD hitting 80 cents and NZD/USD breaking above 0.7500.

“Multiyear highs were reached in many major currency pairs with more gains likely to follow in the days ahead,” says Kathy Lien, Director at BK Asset Management in New York.

While many of the key phrases in the FOMC statement were unchanged from June, markets focused on the removal the word “somewhat” from the reference to inflation “running below 2 per cent”.

The implied probability of a final rate hike this year fell to 58% from the 65% seen before the statement.

There are suspicions that the Fed might be under-emphasising the decline in inflation, which would mean further delays to the interest rate raising regime.

“While the Fed points to the impact of idiosyncratic factors, market participants are questioning whether the Fed will deliver on its normalisation plans and even worry about a policy mistake,” says Harm Bandholz at UniCredit Bank in New York.

But, Bandholz’s studies suggest that concerns of a policy mistake might be misplaced.

UniCredit find that the shortfall in inflation can be explained by a small group of sectors and most of it does indeed appear to be the result of idiosyncratic or unusual developments.

“This means that the slowdown in core inflation rates should only be temporary. Further rate hikes are thus warranted,” says Bandholz.

If correct this view should ultimately put a floor under the Dollar’s declines. But, when markets decide to share this view remains to be seen.