GBP USD Falls After Fed Leaves Door Open to Rate Hikes

GBP USD Exchange Rate Buoyed by Better-Than-Expected PMI data 

A lack of economic drivers in the UK on Wednesday left the pound rangebound against the dollar for much of the day, causing it to meander between 1.34 and 1.35 after recovering from a sharp fall on Monday.

Investors in the dollar had a much busier day in-store, with the minutes from the Federal Reserve’s January meeting of policymakers’ top of the agenda.

Risk sentiment stabilised amid expectations that the central bank was limbering up to indicate it’s primed to begin raising interest rates starting in March.

Markets have been unnerved this week by a combination of Fed rate speculation and slowing growth, prompting investors to seek shelter in safe-haven assets such as the dollar.

Investors were also awaiting details on how the Fed aims to reduce its almost $9 trillion balance sheet – AKA quantitative tightening (QT).

Before the main event, new home sales data hit the headlines. The supply of new homes for sale in the US receded in December as buyers wrestled with a tight market.

New home sales jumped almost 12% to an annual rate of 811,000 last month, figures published by the US Census Bureau showed on Wednesday. Compared to a year earlier, sales were down 14%.

Sales totalled 762,000 for the whole of 2021, according to the preliminary figures released in the December report – down from 822,000 sales in 2020. Economists had forecast new home sales in December to rise to an annual rate of 757,000.

The dollar received a shot in the arm when Fed chair Jerome Powell surprised market participants by hinting at larger and faster than expected interest rate rises.

Speaking after the conclusion of the central bank’s two-day meeting on Wednesday, Powell told reporters that FOMC members were keen to start hiking borrowing costs in March to tame red-hot inflation.

While he outlined that no decisions had been made, he stopped short of ruling out a 50-basis point hike. Instead saying that the economy seemed more robust than during the most recent hiking cycle and inflation was running even further away.

“There’s quite a bit of room to raise interest rates without threatening the labour market,” he said.

The resurgent dollar dragged the GBP USD rate lower – by this morning it was hovering above 1.34.

Looking ahead

A raft of influential data sets are slated for publication in the US today: core personal consumption expenditures, durable goods orders, initial jobless claims for the week ended 21 January, nondefense capital goods orders (excluding aircraft), pending home sales and gross domestic product – with the US set to report a robust 5.4% annualized growth rate for Q4 2021.

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