Dollar weakens off the back of FOMC meeting, Bank of England poised to raise interest rates to 14 year high
There has been plenty of volatility in the markets overnight, following the FOMC meeting last night, and in anticipation of the ECB and BoE rate decisions this afternoon.
FOMC:
The US Dollar fell sharply against the Pound, Euro and other major currencies after Federal Reserve Chair Powell said the U.S. economy would not require significantly more rate hikes to bring inflation lower. In fact, "for the first time, we can declare that a deflationary process has begun," said Jerome Powell in a press conference that followed an announcement by the Federal Reserve that interest rates would rise by a further 25 basis points.
The hike now takes the target range for the federal funds rate to 4.5%-4.75%, a move that was widely expected. But the messaging from Powell has been interpreted by markets that the Fed is close to reaching its terminal destination - and this is a key factor as to why GBP/USD has rallied so significantly from yesterday.
Policymakers did not see this as an opportunity to take a breather, stated Powell. "A pause is not something that the FOMC is on the point of deciding right now." However the press conference was, on balance, more 'dovish' than expected and we did not see Powell push back against expectations for a rate cut later in the year.
Bank of England:
Despite the risk of a looming recession, the Bank of England is expected to raise UK interest rates for the 10th time in a row today as it continues to battle inflation. Economists are predicting the BoE will lift Bank Rate by another 50bps, up to 4%, the highest since autumn 2008
Whilst the Bank is expected by markets to raise interest rates by 50 basis points, the expectations for a 25bp have been slightly increased amidst fresh signs the UK economy is slowing under the weight of previous rate hikes. This has come from UK consumer price inflation which eased slightly to 10.7% in November, down from 11.1% in October, offering hopes that price pressures may have peaked.
A 25bps hike would be likely to send the GBP into a trend of underperformance vs the USD but more pertinently the EUR, which it has already struggled against since the middle of January. With the ECB set to raise rates by 50 or 75bps today as well, the rate could be expected to continue spiralling down, possibly breaching the support level of 1.1217.
With such a busy day ahead, we are expecting vast volatility surrounding all 3 major currencies. If you require a quote or would like any additional information, please do reach out and we would be happy to help.
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