Pound rallies on hopes of more dovish Fed, in wake of minutes release
After a rough year against the US dollar, the pound is ending 2022 with a late spurt. GBPUSD hit its highest point since August 17th when the rate touched 1.2113 this morning, lifted by hopes that the Federal Reserve might slow the pace of its rate hiking cycle as soon as this month.
The pound has now regained almost 20 cents since hitting its record low in September after the mayhem caused by the now-ditched mini-budget of Liz Truss and Kwasi Kwarteng. It has strengthened today on the news that a “substantial majority” of Federal Reserve officials want to slow the pace of interest rate rises soon, according to Refinitiv.
A stronger pound could help cool the UKs inflation crisis, as it will therefore make imported goods like fuel and energy less expensive – even though GBP is still down 10% against the dollar this year, with highs of 1.3750 being noted in January.
The release of minutes from the Federal Reserve November meeting, where it hiked its benchmark rate by 75-basis points for the fourth time in a row, suggest that many officials could push for a smaller rise of 0.5 percentage points in December, which seems to be already priced in the markets.
The Fed have already raised their target rate to 3.75%-4%, up from 0%-0.25% at he start of the year, as it tried to stamp out elevated inflation. Consumer price inflation has now slowed, and is expected to keep dropping. So with the global economy weakening, officials are wondering whether they can be less aggressive now.
The Bank of England is expected to raise its own interest rates by another 50 basis points in December too, from 3% to 3.5%. And a surge in people quitting the UK workforce because of poor health or early retirement could force the BoE to further increase interest rates, with the possibility of another substantial hike nearly fully priced in this month.
Chief economist Huw Pill warned last night that the departure of more than half a million workers from the jobs market since the Covid pandemic risked stoking inflationary pressures, long after the shock from sky-high energy prices is likely to fade.
Despite the rising inflationary pressures, sterling has rallied substantially since the post mini-budget low on September 26th. Another one of the reasons for the recent resurgence has been a shift in global investor sentiment, which has been predominantly positive for the pound, yet impacted on the dollar. As a general rule of thumb, when investor sentiment declines and markets are deemed risk-off, this is beneficial to safe haven currencies such as the dollar.
However, when market risk sentiment is deemed positive, or risk-on, this will do the opposite and more often than note benefit the GBP.
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