July 13, 2017 - Written by John Cameron
STORY LINK USD GBP Exchange Rate Slumps to Weekly Low Following McCafferty Comments
The US Dollar Pound (USD GBP) exchange rate plummeted this morning following hawkish comments by Bank of England (BoE) policy maker Ian McCafferty.
Pound (GBP) Rallies on QE Comments
Sterling sentiment soared this morning as a member of the BoE’s Monetary Policy Committee (MPC) suggested that the bank should begin winding down its quantitative easing programme.
McCafferty, who is a known hawk at the bank argued that the BoE should rethink its policy on not wrapping up its bond buying programme until after interest rates have normalised again.
The BoE’s current policy would see its £435bn stimulus package remain in place until interest rates returned to 2%, something that is expected to take a number of years given that rates are currently only at 0.25%.
However McCafferty has pointed to the Federal Reserve’s recent decision to start the winding down of its own bond buying programme as a sign that the BoE should be thinking of doing the same.
McCafferty said in an interview with The Times;
‘Given that other central banks are thinking about it, I think it would be remiss of us not to at least think about it, I think it's a question that needs a bit of asking.’
Meanwhile McCafferty also made it clear in his interview that he would be again voting to raise interest rates in August’s MPC meeting after previously pushing for a rate hike in June’s meeting, saying, ‘As of today, I would not be changing my position’.
The BoE Hawk pointed the UK’s strong employment figures and ballooning inflation as signs that the economy would be able to handle higher interest rates, warning that ‘consumer growth will slow’ if inflation is allowed to keep rising as he predicts it would likely ‘peak at over 3%’.
US Dollar (USD) Weakened as Yellen Downplays Possibility of Accelerated Rate Hikes
The US Dollar stumbled on Wednesday as Federal Reserve Chair Janet Yellen testified in front of Congress over the state of the US economy.
Many investors were left disappointed by her testimony as Yellen appeared to strike a more dovish tone than expected as she signalled that while interest rates are likely to continue to rise it would be more gradual than some analysts have predicted.
Michael Hewson Chief Market Analyst at CMC Markets said;
‘The US dollar slumped after Fed chief Janet Yellen caught investors by surprise by leaning back from the prospect of multiple rate hikes in the coming months.’
‘Market reaction was also reinforced by her comments that inflation was running below target and that rates wouldn’t need to rise much further to get back to neutral. This comment in particular suggests that the Fed believes that a lot of the heavy lifting on rates may well have been done in the short term, which may help explain why we saw long term yields slip back down to a one week low, and certainly takes a September rate rise off the table.’
Yellen did however confirm that the Fed would begin winding down its stimulus programme later this year, with the central bank seeking to reduce its $4.5 trillion bond portfolio that it has obtained over the last ten years.
USD GBP Exchange Rate Forecast: Yellen Testimony to Continue Later Today
The USD GBP exchange may retreat even further this afternoon as Yellen prepares to face her second day in front of Congress, where she is expected to be quizzed by senators on the Fed’s monetary policy and the poor performance of US economic data in recent months.
Meanwhile the Pound may face increased pressure over Brexit with the UK government likely to face some opposition when it publishes its repeal bill later today, while the bill while not be debated upon for a few months, analysts predict that those opposing Theresa May’s Brexit plans will use the bill to put forward their own plans for Brexit, likely added to even more uncertainty over the whole process.
Current Interbank Exchange Rates
At the time of writing the USD GBP exchange rate was trending around 0.7741 and the GBP USD exchange rate was trending around 1.2920.
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TAGS: Dollar Pound Forecasts