Pound US Dollar (GBP/USD) Exchange Rate Hits 16 Week High as Fed Powell Strikes Dovish Tone

December 1, 2022 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Hits 16 Week High as Fed Powell Strikes Dovish Tone

Pound US Dollar (GBP/USD) Exchange Rate

The Pound US Dollar (GBP/USD) exchange rate strengthened on Thursday, as investors began to pull away from USD following a dovish pivot from Federal Reserve Chair Jerome Powell.

At the time of writing, GBP/USD was trading at roughly US$1.2187, an increase of around 0.9% from Thursday’s opening rates, and a 16-week high.

US Dollar (USD) Weakens as Powell Signals Dovish Fed Pivot

The US Dollar (USD) struggled for support on Thursday following an overnight speech from Federal Reserve Chair Jerome Powell. In his speech, Powell indicated that the Fed was likely to begin slowing down their interest rate hikes, prompting a return in global risk appetite.

As such, the safe-haven ‘Greenback’ struggled for support, despite Powell’s insistence that the Fed still had work to do in order to combat soaring inflation, and prevent it from becoming entrenched in US businesses.

Exploring the impact of Powell’s speech further, Bloomberg’s Chief US Economist Anna Wong stated: ‘Powell clearly rejected the notion of a shock-therapy style of rate hikes for inflation risk management purposes. Rather, he favors moving more slowly amid uncertainty and holding rates high for a longer period.’

Similarly, the US Dollar was muted by market expectations of a fall in the Core PCE Price Index. As the Fed’s preferred measurement of inflation, investors expected a fall from 5.1% to 5%, and moved to price in a more modest rate hike of 50bps in December.

Further adding the ‘Greenback’s woes on Thursday was a fall in US treasury bond yields. As such, investors remained on the track of exploring riskier investment opportunities, leaving the safe-haven USD behind.

Pound (GBP) Rises despite Darkening Economic Outlook

The Pound (GBP) enjoyed firm gains against all major peers during Thursday’s session, as a strong risk appetite served to negate a worsening economic outlook.

The increasingly risk-sensitive Sterling saw boons on the back of this market shift, as the cost-of-living crisis continued to unfold within the UK.

Ofwat released a report on Thursday which highlighted that 75% of people aged 18 to 34 in the UK were sometimes struggling to pay household bills, and that a fifth of all British households were struggling to pay water bills. With the cost-of-living crisis continuing to squeeze households, investors were mindful of this impact on the wider economy.

Elsewhere, the UK’s housing market continued to plummet, with a 1.4% drop in prices recorded during November, the fastest fall since June 2020.

Victoria Scholar, the Head of Investment at Interactive Investor, explored this further. She stated: ‘This was the biggest monthly decline in June 2020 at the height of the pandemic. The fiscal fiasco of the mini-budget which pushed mortgage rates sharply higher added to existing upward pressure on lending rates and sharply weighed on housing demand in Britain. Macroeconomic pressures from the rising cost of living and a slowing economic trajectory are dampening demand for housing with many potential buyers opting to rent instead for now until house prices and mortgage rates come down next year.’

With the economic outlook continuing to darken in the UK, Sterling’s gains may have been capped during Thursday’s session.

Pound US Dollar (GBP/USD) Exchange Rate: US Non Farm Payroll Drop to Dent USD?

Looking ahead, the core catalyst of movement for the Pound US Dollar exchange rate is likely to be Friday’s release of the Non Farm Payrolls figures for November.

The key data for the US labour market is forecast to show a fall from 261000 jobs created to 200,000. While reflecting a strong labour market, the slowdown may weaken the ‘Greenback’ by pointing to a tighter labour market, which could lead to softer rate hikes from the Fed.

For the Pound, domestic headlines are likely to remain the key driver of movement in the absence of any macroeconomic data. With the cost-of-living crisis continuing to unfold, any further downbeat news could weaken Sterling.

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