GBP/USD Rate Slumps as Powell Disappoints the 'Pivot' Seekers

File image of Jerome Powell © Federal Reserve

The Dollar strengthened in the hours following another large U.S. interest rate hike and a clear message from Chair Jerome Powell that further hikes were necessary to bring inflation lower.

The Fed raised interest rates 75 basis points on Wednesday - as expected - but sent a signal it was time to slow down, suggesting a 50bp move in December was now likely.

Dollar exchange rates were nevertheless well supported with Powell sending the clear message in his press conference that although the era of outsized hikes was over, more work was to be done.

Above: The Dollar index shows the spike in value during Powell's press conference. To better time your payment requirements, consider setting a free FX rate alert here.

In the press conference following the decision Powell said it was "very premature" to think about pausing rate hikes.

This might have disappointed those looking for a clearer sign of a 'pivot' and was therefore on balance consistent with a stronger U.S. Dollar.

The Pound to Dollar exchange rate is over two-thirds of a percent lower at 1.1411 at the time of writing, the Euro to Dollar rate down 0.45% at 0.9833.

Further impetus for the Dollar was provided by Powell's acknowledgement to the media that although the Fed was ready to slow the pace of rate hikes it would likely still need to deliver more of them.

Thus, rates are going higher than previously expected, albeit in smaller increments.

It is this 'pricing in' of a higher ceiling that helps explain the Dollar's jump during the press conference.

Powell was told by a reporter during the press conference that markets had reacted positively to the Fed's decision, information that appeared to evoke a strong response from Powell:

"There's no sense that inflation is coming down."

Regarding the terminal level of rates estimated by the Fed in September, Powell said, "the incoming data suggests that will be higher" than estimated by the Fed in September.

This presented a clear pushback against the market that the rate hiking cycle is far from over.

"It's premature to discuss pausing... that's really not a conversation to be had now," said Powell.

The November Federal Reserve Open Market Committee (FOMC) meeting will nevertheless be remembered for the addition of this line to its press statement:

"The Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

Above: GBP/USD at 15-minute intervals. If you are looking to secure your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.

The Fed Funds rate range has now reached 3.75%-4.00% and markets were looking for it to terminate at just above 5.0% ahead of the November meeting, suggesting the potential for a mere handful of future hikes.

"The statement has changed significantly, with the addition of language indicating that the Fed is now attentive to the likely impact of its previous actions," says Ian Shepherdson, Chief Economist at Pantheon Macroeconomics.

The Fed is therefore slowing down but is clearly of the view much more needs to be done to fight inflation and the terminal rate has thus risen above 5.0%.

This has proven to be a disappointment for those looking for a pivot and is therefore supportive of the Dollar.