The pound crept towards a one-month high against the dollar on Thursday as a risk-on mood returned to markets after the US Federal Reserve issued its interest rate outlook.
GBP USD rose sharply on Wednesday above 1.21 after the US central bank maintained the pace of its policy tightening cycle before inching higher the next day.
An absence of economic data, a protracted Conservative Party leadership contest, and a fallow month for Bank of England (BoE) policy meetings left the pound short of domestic drivers in July.
Fed hikes rates again in July
The dollar rallied on Thursday as investors assessed the Fed’s comments on the future path of interest rates following its widely expected 75 basis points (bps) hike.
On Wednesday, the central bank said it would persevere in its fight against four decades-high inflation in the US, even if that means weathering a “sustained period” of economic weakness and a slowing labour market.
The Fed stopped short of saying what to expect next. However, markets already raised bets of a slowing pace of future US rate hikes, with a 50 bps rise in September now considered most probable.
Following the latest move in the most hawkish interest rate cycle in roughly four decades, Fed Chair Jerome Powell faced questions about the US economy slipping into a recession.
“I do not think the US is currently in a recession,” he told reporters after the central bank’s July policy meeting, citing a low unemployment rate, robust wage growth and job gains. “It doesn’t make sense that the US would be in recession.”
The US economy continued to contract between April and June, unofficially signalling the start of a recession. Figures released by the US Commerce Department on Thursday showed gross domestic product (GDP) – a broad measure of the price of goods and services – fell at an annual rate of 0.9% in the second quarter after decreasing at an annual rate of 1.6% between January and March.
Speaking after the print, US president Joe Biden said it wasn’t surprising that the economy is slowing down as the Federal Reserve moves to get inflation down. He added that they would emerge from this transition stronger and more secure even as they confront “historic global challenges” to take the “right path”.
Looking ahead
The Consumer Credit, the amount of money individuals borrowed in the previous month, the BoE releases Friday.
In the US, a handful of notable data sets hit the headlines:
- Core personal consumption expenditures price index
- Personal income
- Personal spending
- Chicago purchasing managers’ index
- Michigan consumer sentiment index
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