Powell Spooks Markets, Pound Sterling Sheds Gains against Euro and Dollar

File image of Jerome Powell © Federal Reserve

Spot Market Rate at Publication:
GBP/USD: 1.3775

Stock markets sold off ahead of the weekend amidst a deterioration in investor risk sentiment linked to comments made by the Chairman of the Federal Reserve, Jerome Powell.

The British Pound lost ground against the Euro, Dollar and other currencies that tend to benefit in times of market weakness, confirming global risk sentiment to still be a major driver of the UK currency's valuation.

Investors appeared to take money off the table after Federal Reserve Chairman Jerome Powell gave a firm commitment to the process of 'tapering' the Fed's quantitative easing programme in November.

This intention has been well telegraphed to the market but Powell also hinted at a more aggressive approach to ending easy monetary conditions when he said inflation was likely to "last longer than expected".

Powell told an audience at a Bank for International Settlements' SARB Centenary Conference that inflation is now well above the Fed's target, which the market seemingly interpreted to be part of a more 'hawkish' than expected address.

Above: The S&P 500 index took exception to the contents of Powell's speech.

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The Dollar rallied as did other so-called safe havens like the Yen and Franc.

"S&P now reacting negatively to Powell, bringing back some safe-haven yen demand," says Erik Bregar, an independent FX Analyst.

The Pound lost ground against major currencies, a move that is testament to its 'high beta' status (this means it tends to follow the major stock markets higher or lower).

The Pound to Dollar exchange rate dipped below 1.38 to trade 1.3770, the Pound to Euro exchange rate retreated from 20-month highs back to 1.1840.

Powell joins other central bankers - namely his colleague at the Bank of England, Andrew Bailey - in striking a decidedly more downbeat tone on the outlook for U.S. and global inflation.

Bailey is concerned that the surge in inflation caused by high energy prices and global supply chain bottlenecks will ultimately feed into domestic inflation rates and become more entrenched.

Markets have aggressively repriced their expectations for Bank of England policy as a result, pricing in a November rate hike and a series of rate hikes in 2022 that could take the Bank Rate as high as 1.0% by year-end.

Above: The Pound retreated from its previous highs against the Euro (top) and Dollar (bottom) in sympathy with deteriorating investor sentiment.

A similar theme appears to be playing out with regards to the Fed.

For global markets this is significant given the Fed's centrality to global finance: a more aggressive path of rate hikes will suck liquidity out of the global economy and pose headwinds to growth.

Looking ahead, if this theme extends into the coming week global stock markets could struggle and so too could the Pound.

The Dollar could meanwhile restart a rally that has stalled in October.