Fed signals pause in interest rate hikes – will the ECB help or hinder sterling?

The US Federal reserve announced last night that they would be raising interest rates for the 10th consecutive time. The move raised US interest rates by 25 basis points up to 5.25%, the highest level since 2007.

In general, interest rate rises can lend support to the value of the currency, however, the US dollar lost ground across the board following the Fed’s announcement. The Fed indicated that future interest rate rises could be limited given the potential restraint on the economy. Markets have digested this as a ‘dovish’ hike which has led to dollar weakness. Expectations for future rises is now limited which could also weigh on the dollar.

Cable (GBPUSD) rose close to yearly-highs during the evening session while EURUSD rose to 13-month highs. EURUSD (the most traded currency pair globally) could be in for further volatility today as markets await the ECB decision.

Expectations are for the ECB to raise interest rates by 25 basis points which could lend support to the value of the euro and push EURGBP and EURUSD higher. However, a lot will depend on the manner of the hike and the commentary provided. A ‘dovish’ hike would suggest a pause in interest rate rises at the next meeting.

Sterling remains one of the strongest performing currencies of 2023 while subdued against the value the single currency. Future exchange rates will depend on the message from the ECB today and the Bank of England next week. Goldman Sachs are predicting 3 further hikes from the BoE which you would expect to help sterling’s value against the euro. Tomorrow will see the release of monthly non-farm payroll data in the US which has a tendency to cause volatility in the currency markets.

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