Federal Reserve could cut interest rates on Wednesday this week: What could happen to the Pound to US Dollar exchange rate?
The pound to US dollar interbank exchange rate at the end of last week fell to the lowest levels in 2 years. It is now widely anticipated in the currency markets that the US Federal Reserve, the US central bank, will look to cut interest rates at their latest meeting on Wednesday. The US Federal Reserve have been openly discussing the prospect of lowering levels and the consensus seems to be for a 0.25% cut in their current 2.25-2.5% rate.
The typical knock on effect of cutting interest rates is to weaken the currency concerned, however this is not always true. Further, in this case, where a cut is being anticipated in advance, the movements in the currency market can be anything but predictable.
Various interpretations of behaviour would include the US dollar rising since some observers were previously predicting a cut of 0.5%. By cutting interest rates less than some had expected, previous historical behaviour would indicate a possible rise in the value of the currency, as the currency market pared back on its previous bets.
How much will the Federal Reserve cut interest rates by?
Expectations now are for the Fed to cut by 0.25%, with Reuters reporting a poll of 111 economists, 105 backed the 25 basis points cut. Looking forward, the market will have other events this week to be conscious of, including the US Non-Farm Payroll data (NFPR) which is due on the Friday 2nd August.
Strong US economic data and no deal Brexit fears causing movement on Pound to US Dollar exchange rate
The GBP/USD exchange rate has slipped back below 1.2350 this morning, on the expectations that no-deal Brexit remains a real possibility, and that the US economy will remain strong, following a very strong outcome from the latest US GDP (Gross Domestic Product) data released last week showing 2.1% growth versus the 1.8% prediction.
In terms of the importance of the data being released, the US interest rate decision is very high on the list. Historically, US interest rate offer the chance of increased volatility, particularly this week with such focus on the predicted changes.
GBP/USD is also in for a busy week since we also have the latest UK interest rate decision due on the Thursday. Whilst no changes in policy are predicted, there are some market observers who feel the chance of the UK cutting interest rates has increased in recent weeks.
Clients with a position to buy or sell GBP/USD ahead have plenty to consider. For more information on the latest news plus an explanation of your options, please do contact me directly to learn more.