Pound to Dollar Rate Hits Two-and-a-half-year High on Bumper Fed Rate Cut

Above: File image of Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.

Pound Sterling rose against the Dollar and Euro after the Federal Reserve cut interest rates by 50 basis points.

However, the Pound is off its peak after the Fed's Chair Jerome Powell cooled expectations about expecting subsequent big hikes.

The market did not fully expect the Fed to start with a bang (60% odds), and there was some speculation that it could play it safe with a 25bp move. The decision was, therefore, a surprise that bolsters market sentiment, boosts stocks and weighs on the Dollar.

The Pound to Dollar spiked to a new two-and-a-half-year high at 1.3297 in the wake of the decision, with gains also coming against the Euro.

The uplift in market sentiment has boosted the pro-cyclical currencies - such as the Pound, Australian and New Zealand Dollars - while prompting losses in the safe havens such as the U.S. Dollar and Franc.

The decision by the Federal Open Market Committee (FOMC) had notable 'dovish' elements that hint at further interest rate cuts to come. 11 of the 12 voting members supported the action and only Michelle Bowman preferred a 25bp easing.

Above: GBP/USD (top) and GBP/EUR showing big gains on Fed day.

There was a chance the Fed would opt to cut by 50bp but signal it would like to assess its impact, thereby hinting that it could skip a hike at the next meeting. This would have proven a 'hawkish' outcome that could have weighed on sentiment and boosted the Dollar.

However, new projections from the FOMC's members showed the median forecast for the mid-point of the range at the end of this year has dropped to 4.375%, from 5.125% in June.

This was below what the consensus of economists expected, at 4.625%.

"This implies a further 50bp easing over the next two meetings," says Samuel Tombs, Chief U.S. Economist at Pantheon Macroeconomics. "Committee members have made sweeping revisions to their expectations for the pace of future policy easing, signalling a sharp increase in anxiety about current trends in the labor market."

Tombs notes that the 75bp downward revisions to the median rate forecasts for both the end of the current year and the next year are the largest at these horizons since the Summary of Economic Projections was first published in January 2012.

In the press conference, Powell sought to push back against expectations for ongoing generosity fromt he Fed as he said "the US economy is in a good place and our decision today is designed to keep it there."

He warned against expecting 50bp increments to be the Fed's "new pace".

His comments will cool market excitement and could prompt an easing back from recent highs in assets that spiked following the initial decision.

Paul Ashworth, Chief North America Economist at Capital Economics, says despite the bigger opening move, unless Fed officials become more concerned about the downside risks to the labour market, it looks like we will see a more measured pace of rate cuts from now on.