Pound to Dollar Retreats on Powell Guidance

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

The Dollar is bid at the start of the new month and final quarter of 2024, helped along by Federal Reserve Chair Jerome Powell's latest guidance on interest rates.

Powell indicated on Monday that the Fed expects to implement two more interest rate cuts by the end of 2024, which is less than the market is currently expecting.

The fresh guidance pressured the Pound to Dollar exchange rate (GBP/USD) further from its 2024 highs to 1.3342 at the time of writing on October 01.

"The US dollar reacted positively to Powell’s comments, gaining ground across the board," says Achilleas Georgolopoulos, Investment Analyst at XM.com.

Ahead of Powell, the market was priced for up to 70 basis points of rate cuts over the remainder of the year, which would entail at least one more 50bp cut and another 25bp move.

However, this new guidance from the Chair would suggest markets would be better positioned expecting two further 25bp moves.

"Powell explicitly pushed back against a 50bp rate cut by year-end," says Francesco Pesole, FX strategist at ING.

GBP/USD investment bank consensus forecasts: The end-2024 and 2025 guide from Corpay has been released. It shows a sizeable uplift was made to the consensus forecasts for GBP/USD. Please request a copy here.

Markets have grown emboldened in their thinking that the Federal Reserve will now rapidly cut interest rates, which would boost the U.S. economy, lower bond yields and pressure the Dollar.

"Powell said the base case is two 25bp moves by year-end, which is unusually specific guidance that signals his discontent with market dovish pricing," explains Pesole.

Analysts at Goldman Sachs say the U.S. economy continues to throw out "relatively solid activity data" and "recent labour market news has been relatively encouraging."

Above: There is ample scope for a near-term GBP/USD pullback.

Given this, "the recent tendency to sell Dollars on all types of news looks unsustainable," says Kamakshya Trivedi, a currency market analyst at Goldman Sachs.

Yet, Powell's messaging is hardly remarkable and it looks mundane for the markets to quibble over 25 basis points of rate cuts given the broader directory is one of significant rate cuts in the coming months.

Given this, the comments are no trend-turner for a declining Dollar and the path of least resistance for Pound-Dollar remains higher, albeit at a likely slower pace with deeper pullbacks along the way.

This Friday's labour market report from the U.S. will be important in this regard as an above-consensus reading will start to give the impression that the Fed will have to proceed slowly on rate cuts.

If this view becomes more entrenched a period of Pound-Dollar weakness could ensue.