Fed’s Powell Triggers Dollar Rebound, Pound US Dollar Rate Held Below 31-Month Best

October 2, 2024 - Written by Frank Davies

STORY LINK Fed’s Powell Triggers Dollar Rebound, Pound US Dollar Rate Held Below 31-Month Best

The Pound to Dollar (GBP/USD) exchange rate was unable to hold above the 1.3400 level on Monday and retreated to 1.3330 on Tuesday as Federal Reserve Chair Powell pushed back against market expectations.

Markets are also continuing to monitor Middle East developments given the potential for defensive dollar demand if fighting escalates.

Domestically, markets continue to expect only one Bank of England rate cut in November which should limit any Pound selling.

According to UoB; “the current price movements are likely part of a range trading phase, probably between 1.3300 and 1.3430.”

In Monday’s discussion on the economy, Chair Powell stated that "This is not a committee that feels like it is in a hurry to cut rates quickly.”

Powell pointed to the upward revision to the Gross Domestic Income (GDI) data which suggested that there would be on-going support to the economy through consumer spending. Stronger growth would lessen the pressure for more substantial rate cuts.

Unusually, Powell was quite specific in forward guidance and commented; "If the economy evolves as expected, that would be two more cuts by year's end, for a total reduction of half a percentage point more.”

Markets are now pricing in around a 65% chance that the Fed will cut interest rates by 25 basis points at the November meeting with diminishing potential for a larger 50 basis-point move.

Traders, however, still expect a large move in December.

ING commented; “the Fed Funds Future curve is factoring in 70bp of cuts by December, effectively betting that soft data will force a September-like Fed surprise in one of the next two meetings. That signals the balance of risks in the very near term is probably skewed to the upside for the dollar.”

US data will still be watched very closely given the importance of the labour market. Job openings data is due on Tuesday with the key employment report on Friday.

MUFG noted; “The comments will place even more focus on the release of the latest nonfarm payrolls report on Friday.”

It added; “Powell comments provide some temporary relief for the US dollar.”

The US will also release the latest ISM business confidence data on Tuesday with manufacturing expected to remain in contraction.

Domestically, the PMI manufacturing index was unrevised at 51.5 in the final September reading.

The British Retail Consortium (BRC) reported that UK shop prices declined 0.6% in the year to September after a 0.3% decline previously and the largest decline since August 2021.

Food prices, however, increased 2.3% over the year from 2.0% in August.

According to BRC boss Helen Dickinson; "Easing price inflation will certainly be welcomed by consumers, but ongoing geopolitical tensions, climate change, and government-imposed regulatory costs could all reverse this trend."

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TAGS: Pound Dollar Forecasts