US Interest Rates Rise : Pound Dollar GBP USD Exchange Rate Forecast to Slump

December 17, 2015 - Written by Frank Davies

STORY LINK US Interest Rates Rise : Pound Dollar GBP USD Exchange Rate Forecast to Slump

Federal Reserve Raised Overnight Cash Rate by 25 Basis Points

As expected, yesterday evening saw the US Federal Reserve raised its headline interest rate for the first time in nine years. The 25 basis point hike had been largely factored-in by investors, but the tone of the rhetoric used by the US central bank in its accompanying statement surprised some and triggered pronounced price action in the markets.

The Fed missive stated that, ‘there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent.’

Fed look for Inflation to Meet Targets in Order to Determine Future Policy Decisions

The Fed commentary went on to explain the likely rationale behind future policy decisions, stating that, ‘in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.’

However, the clincher, as far as global investors were concerned, came in the form of the below assurance from the Fed that a ‘steady as she goes’ policy will be the path for the new rate-hiking cycle - ‘the Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.’

As a final caveat, the US central bank did note that, ‘the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.’

GBP to USD Exchange Rate saw WORST of 1.4908 in Aftermath of Fed Rate Hike

The upshot of the Fed statement has seen support for the US Dollar (currency : USD) surge, sending the GBP USD exchange rate down to as low as 1.4908 earlier.

Global shares have also surged, largely thanks to the Fed’s suggestion that a path of gradual rate increases will now be followed.

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TAGS: American Dollar Forecasts Pound Dollar Forecasts Pound Sterling Forecasts