Pound Dollar Exchange Rate Surges amid Fed rate cut speculation

September 17, 2024 - Written by John Cameron

STORY LINK Pound Dollar Exchange Rate Surges amid Fed rate cut speculation

The Pound US Dollar (GBP/USD) exchange rate jumped on Monday amid rising Federal Reserve interest rate cut bets.

At the time of writing GBP/USD was trading at $1.3196, up approximately 0.5% from Monday’s opening rate.

US Dollar (USD) Sinks as Markets Await Fed Rate Decision

On Monday, the US Dollar (USD) edged closer to multi-year lows as the absence of new US economic data left markets poised for the Federal Reserve's imminent interest rate decision, scheduled for Wednesday.

Market consensus largely expects the central bank to initiate a policy easing cycle this week, though analysts are divided on whether the Fed will implement a modest quarter-point rate cut or opt for a more substantial half-point reduction.

Current projections from the CME FedWatch Tool indicate a 59% probability that the Fed will enact a significant 50 basis-point cut, versus a 41% likelihood of a more conservative 25 basis-point reduction. With increasing concerns over the US labor market's robustness and broader fears of a potential US recession this year, the pressure is mounting on the Fed to start softening its monetary stance.

Kathleen Brooks, Research Director at XTB, said:

‘The case for a 50bp rate cut boils down to two things: first, the economic conditions and second, the risk of the Fed falling behind the curve. The economic data is getting weak in the US. The Citi economic surprise index for the US is close to its lowest level since 2015, the labour market is cooling and there are signs of distress in the manufacturing sector, which has been languishing in contraction territory since April.’

Consequently, the US Dollar experienced a downturn during Monday's European trading session, lingering near recent lows as speculation about the Fed's next moves intensified.

Pound (GBP) Muted amid UK Economic Concerns

The Pound (GBP) traded within a tight range as the week commenced with limited economic data from the UK.

The absence of significant economic updates saw concerns about the UK government’s upcoming Autumn Budget sapping appeal for the Pound.

Increasing anxiety over potentially steep tax increases and substantial spending cuts in UK Chancellor Rachel Reeve's forthcoming budget heightened fears of a significant shortfall in the UK's public finances.

In response to these concerns, a cadre of prominent UK economists publicly urged Chancellor Reeves to rethink the proposed fiscal measures for the pivotal 2024 Autumn Budget.

Their recommendations were highlighted in a letter published in the Financial Times, which read:

‘We do not see how the planned “decade of national renewal” can take place if these cuts are delivered. To follow through on these plans would be to repeat the mistakes of the past, where investment cuts made in the name of fiscal prudence have damaged the foundations of the economy and undermined the UK’s long-term fiscal sustainability.’

Amidst persistent economic uncertainties and a lack of clear data, GBP investors remained cautious, steering clear of bold moves on the Pound as a renewed sense of economic pessimism in the UK diminished Sterling sentiment.

Pound US Dollar Exchange Rate Forecast: US Retail Data in Spotlight

Looking forward, the upcoming release of US retail data on Tuesday afternoon will be closely watched.

With the Federal Reserve's rate decision on the horizon, any indication of decelerating consumer spending could exert additional downward pressure on the US Dollar.

Investors are likely to exercise caution with the Pound, preferring to wait for the UK inflation figures set to be released mid-week before making significant moves.

Should the data reveal persistent inflationary pressures in the UK, the Pound may strengthen against its counterparts. This could fuel expectations that the Bank of England might adopt a less aggressive approach to easing monetary policy compared to other major central banks, ahead of the central bank's interest rate decision scheduled for Thursday.

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TAGS: Pound Dollar Forecasts