GBP/USD Rate Hits Jan. Lows as Powell Warns Fed is Far from Done on Interest Rate Hikes

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The Pound to Dollar exchange rate (GBP/USD) fell to its lowest level since January 06 following comments from the Chair of the Federal Reserve, Jerome Powell.

Stocks fell and the Dollar was bid higher across the board after Powell told a hearing of the U.S. Congress that Federal Reserve interest rates would need to go higher than had previously been expected.

In prepared comments Powell said:

"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated."

Powell's testimony follows a spate of better-than-expected U.S. economic data prints that suggest the Fed must do more to cool the economy and curb inflation.

As a result, Powell said he is prepared to increase the pace of rate hikes if needed.

In response to the testimony, Fed Funds futures showed investors were now pricing in a 50 basis point hike for March, up from 25bp previously.

U.S. short-term bond yields rose in response.

The Dollar rallied, with GBP/USD spot falling to 1.1890, taking bank transfer rates to 1.1530-1.17, competitive cash and holiday rates to around 1.1790 and competitive payment rates to 1.1910.

Above: GBP/USD at daily intervals. Consider setting a free FX rate alert here to better time your payment requirements.

"Powell’s hawkish masterclass has sent the Greenback skyrocketing as institutional investors start parking funds in the Dollar to capitalise on sustained interest rate rises. America’s battle against inflation is far from over, and with the Fed flexing its monetary muscles in response, the Dollar has been the big beneficiary," says Samuel Fuller, Director of Financial Markets Online.

The Dollar fell through the latter part of 2022 and into 2023 as markets raised bets the Fed was close to completing its rate hiking cycle.

The cost of money in the U.S. meanwhile fell as financial markets started to price in rate cuts from the middle of 2023 onwards.

But this dynamic has been overturned by stronger-than-expected economic data prints in February, all of which point to persistent inflationary pressures.

"Powell was as hawkish as he could have been out of the gates. Still depends on the data but he opened up the right tail again," says Brent Donnelly, Head of Spectra Markets.

The Dollar rose 0.82% against the Euro to reach 1.0594, against the Yen it was 0.60% higher at 136.70.

"If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes," said Powell.

US two-year yields jump to almost 5% following the remarks, suggesting markets are starting to believe the Fed will finally do enough to slow the economy and bring inflation lower.