Pound US Dollar (GBP/USD) Exchange Rate Climbs in Wake of Fed Policy Meeting

May 3, 2018 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Climbs in Wake of Fed Policy Meeting

The Pound US Dollar (GBP/USD) exchange rate is ticking higher this morning as markets react to the Federal Reserve latest policy meeting.

US Dollar (USD) Exchange Rate Slips as Fed Looks to Maintain Current Pace of Tightening

The US Dollar (USD) relinquished ground against most of its peers this morning, including the Pound (GBP) as markets digest the Federal Reserve’s latest rate decision.

It came as little surprise to investors yesterday evening as the Fed voted to leave interest rates on hold this month, after voting to raise rates in its March meeting.

While this outcome was expected, markets were still left a little disappointed that the bank’s tone appeared mostly neutral, with the Federal Open Market Committee (FOMC) making no hints of plotting a more aggressive pace of monetary tightening, despite acknowledging the strengthening inflationary pressure in the US.

The Fed’s policy statement spoke of the need for any further tightening to remain gradual in pace as the bank awaits a stronger uptick in wage growth.

Lee Hardman, currency analyst at MUFG said:

‘The US dollar has softened modestly following the release of the policy statement from the latest FOMC meeting.

There has been some disappointment that the Fed’s updated statement did not prove more hawkish than expected. As a result, it has failed to reinforce the US dollar’s current sharp upward momentum.’

The Federal Reserve is expected to deliver its next rate hike when the bank meets again next month, with CME Group’s FedWatch tool placing the odds of a June rate hike at around 95%.

Pound (GBP) Exchange Rate Tempered by Sluggish UK Data

Meanwhile Sterling’s (GBP) gains this morning have been notably tempered by the release of the UK’s latest Services PMI.

According to data published by IHS Markit, the UK’s service PMI ticked up from 51.7 to 52.8 in April, falling short of expectations it would climb to 53.5, with analysts accusing the sector of remaining in the ‘slow lane’.

The survey also caps off what has been a disappointing trio of PMI data in April, with economists warning this slow start to the second quarter currently points to GDP only rising 0.2% in the three months to June.

Chris Williamson, Chief Business Economist at IHS Markit said:

‘The services survey adds to signs that the rate of economic growth remained disappointingly subdued at the start of the second quarter.

The overall expansion signalled by the three surveys in April was the second-weakest since the Brexit vote, pointing to a quarterly rate of GDP growth of around 0.2% at the start of the second quarter.’

The lacklustre run of PMI figures are also seen as further weakening the case for the Bank of England (BoE) to raise interest rates next week.

Williamson adds:

‘The disappointing services data will add to expectations that the MPC will take its finger firmly off the rate hike trigger.’

However with the majority of investors already discounting this possibility, this failed to apply any additional pressure to the Pound exchange rate.

GBP/USD Exchange Rate Forecast: Will the US Dollar Rally on Robust US Service PMI?

Looking ahead the US will release its own assessment of its service sector this afternoon, with the GBP/USD exchange rate likely to retreat if the ISM Non-Manufacturing PMI points to activity having remained solid in April.

Also possibly helping to strengthen the US Dollar (USD) this afternoon will be the publication of the latest US trade figures, with economists forecasting the domestic trade deficit will have narrowed from -$57bn to -$50bn in March.

Meanwhile the shadow of the BoE’s May rate decision is likely to drag on the Pound (GBP) exchange rate over next few day, especially amid a lull in impactful UK data.

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