Pound-dollar rate in relief rally after Fed hike – Tips & Results

  • GBP/USD in corrective post-Fed recovery
  • Fed hints at “a few” more big rate hikes
  • But opts for plan B balance sheet slowdown
  • Risks further profit taking and USD pullback

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

The pound-dollar rallied more than 150 points after the US Federal Reserve appeared to rule out any prospect of raising US interest rates in increments of more than 50 basis points for the time being, while also taking a more cautious-than-expected approach to quantitative tightening tracked (QT).

Dollar exchange rates burst like a dam giving way after the Fed hiked the Fed fund interest rate 50 basis points to 0.75% and 1% late Wednesday, before confirming that markets were recently had rightly bet heavily that a number of these could be taken this year bigger steps than usual.

But the losses quickly piled up after CNBC Chairman Jerome Powell told Steve Liesnan in the subsequent press briefing that “75 basis points is not something the committee is actively considering” and that instead additional hikes of 50 basis points would be expected at the next would be on the table. a few meetings.”

“Financial markets seemed to be reacting to the fact that the Fed was not considering a 75 basis point hike — something that was little more than a risk case,” said David Page, head of macroeconomic research at AXA Investment Managers.

“Whether that reflected a myopic focus on raising interest rates by 75 basis points or a more considered fear of an economic slowdown; These easier financial conditions increase the likelihood of further rate hikes by the Fed,” Page said, even after Wednesday’s decision.

The pound-to-dollar exchange rate rose a percent to a high of 1.2638 on Wednesday before retracing some of those gains to trade at 1.2561 on Thursday, just hours before the Bank of England’s expected 25-rate hike base points.

Prices in some financial markets ahead of Wednesday’s decision suggested that investors were already fully expecting the Fed to hike rates in 0.5% increments on at least the next two occasions, and this could be one of the Reasons may be why the dollar sold off sharply after Chairman Powell’s remarks.

However, the Fed also opted for an effective “Plan B” rather than its originally preferred approach to the now officially announced and forthcoming effort to shrink its balance sheet – and with it the level of stimulus liquidity within the financial system of nearly 9 $ trillion.

“We will consider the broader financial and economic context when making the timing decision,” Chairman Powell said at the March news conference.

Minutes from the March meeting in April had indicated that the Fed’s balance sheet would initially shrink by $95 billion per month, but also made it clear that a more cautious gradual approach would be taken, expecting lower levels “when market conditions warranted”. . time of announcement.

However, the Fed announced a plan this Wednesday that says the bank will begin shrinking its asset holdings by less than $47.5 billion per month for the first three months in June, after which monthly portfolio reductions will ramp up would be $95 billion.

Above: Pound to Dollar exchange rate shown in 15 minute intervals and next to EUR/USD. Click on the image for a closer look.

“The Committee stands ready to adjust full details of its approach to reducing balance sheet size in light of economic and financial developments,” the Fed said in a separate announcement.

The slower phase-in approach is possibly an acknowledgment by the Fed of the noticeable tightening in broader “financial conditions” that has taken place since the last meeting, which has been symptomatic of broad equity market losses, a monstrous rise in bond yields and a vicious US -dollar rally.

“No doubt removing 75bps from the equation at this point will certainly get people excited about long duration and long stock trades, at least tactically. This process could further deflate the USD,” said Mazen Issa, a senior FX strategist at TD Securities.

“In order for this to happen, we believe the market needs to see more evidence of inflation exiting and moderating. This puts the spotlight squarely on the next two CPI reports that the Fed will have leading up to its next meeting. Until then, we’re cautious that a soft USD can really take hold,” adds Issa.

Earlier, the US dollar index had risen to its highest level since 2003, while other currencies such as dominoes, including the pound sterling, euro, Japanese yen, Chinese renminbi and many others, to a potentially uncomfortable degree for some other central banks had fallen.

Above: The US Dollar Index is displayed with weekly Fibonacci retracements of the 2020 decline, indicating various levels of technical resistance to the dollar’s recovery. Click on the image for a closer look.

Losses for other currencies have been an inflationary headache of the kind that could push the European Central Bank (ECB) and Bank of England (BoE) to raise interest rates sooner or faster than they otherwise would.

There’s also a possibility that dollar strength and US bond yields have caused the People’s Bank of China (PBoC) to hesitate in delivering stimulus to China, where measures to contain the coronavirus are accelerating an earlier slowdown.

Meanwhile, these factors were almost certainly the main contributors to the Japanese yen’s recent fall to its lowest level since 2002, rattling the Treasury Department in Tokyo and prompting frequent voices of concern.

“GBP/USD got a boost from the FOMC and is higher at 1.2635. We expect the Bank of England (BoE) to hike interest rates by 25 basis points to 1.0% at today’s meeting (21:00 Sydney time). Nonetheless, we expect the BoE to adopt a dovish tone,” said Carol Kong, currency strategist at the Commonwealth Bank of Australia.

“The updated forecasts will reflect the BoE’s assessment of the impact of the war on the economy. We expect GDP growth forecasts to be revised downwards and inflation forecasts to be revised upwards. A dovish BoE could see GBP wipe out its FOMC-inspired gains, in our view,” Kong and colleagues said on Thursday.

Above: Pound to Dollar exchange rate displayed at daily intervals and alongside EUR/USD. Click on the image for a closer look.

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