Dollar In Big Fall After Federal Reserve Condones Rate Cut Bets

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The Dollar has softened against Pound Sterling, the Euro and other major currencies after the Federal Reserve left interest rates unchanged and condoned market expectations for several interest rate cuts in 2024.

The Fed added a 25 basis point rate cut to its own projections for 2024 and Federal Reserve Chair Jerome Powell said in the press conference that the Committee discussed the timing of interest rate cuts, seeing a need "to reduce restriction well before 2% inflation".

"Those comments suggest rate cuts could happen sooner rather than later," says strategist Joseph Capurso at Commonwealth Bank. "There was a big reaction in the USD and U.S. yields because Powell was considered dovish at his press conference."

The Pound to Dollar exchange rate tested the key support area at 1.25 before rebounding to close the day 0.43% higher at 1.2634 and extending to 1.2639 at the time of writing Thursday.

"In a somewhat surprising move, the Fed has acknowledged recent disinflation trends and poured gasoline on the fire of easing expectations for 2024," says Chris Turner, head of FX research at ING. "For us in FX, we had not expected it this early but last night's dovish Fed shift triggered a massive bull steepening in the US curve – a move that is the centre piece of our call for a broadly lower dollar next year."

Money market pricing shows investors have adjusted positioning by adding 44bp of rate cuts to 2024, taking the total for the year to 155bp.

The accompanying statement showed concerns about slowing economic activity and greater confidence that inflation is on the path to the Fed's 2% target while hinting that policy rates have likely peaked.

This is consistent with the slightly lower 2024 GDP growth forecast in the Summary of Economic Projections (SEP) and the lowering of core and overall PCE inflation expectations for 2023-2025.

Above: GBPUSD at daily intervals, showing the defence of 1.25. Track GBP with your own custom rate alerts. Set Up Here.

Markets had entered the event cautious that the Fed would strike a more 'hawkish' tone, given recent data showing the economy continues to maintain its resilience.

This week's release of inflation figures for November showed prices remain sticky, and some economists warn inflation will tick up in December.

The 'dovish' elements of the Fed's guidance have therefore proven surprising for a market that was wary of greater pushback against growing expectations for cuts in 2024.