Home Daily Commentaries US dollar weaker after Fed hikes interest rates 75 basis points

US dollar weaker after Fed hikes interest rates 75 basis points

Daily Currency Update

GBP/USD is back above 1.21 for the first time since 5th July, and GBP/EUR is trading at its highest level since early May, as the pound steadies itself after a rocky couple of months. The main drivers for the pound’s recent rally are external as there has been little domestic data from the UK this week.

The next big event from the UK is August 4th's interest rate decision from the Bank of England where we could possibly see a 50bp interest rate hike announced from BoE Governor, Andrew Bailey. The Bank has never raised rates by more than 25bp since it gained independence from the government in the late nineties, so this would be an unprecedented move. However it isn't a done deal given that the Bank’s Monetary Policy Committee opted for a 25bp raise last time, when most were predicting 50bp. GBP/USD is around 1.2185 and GBP/EUR is at around 1.1945.

Key Movers

Yesterday's big news was last night’s interest rate decision from the US Federal Reserve which saw a second consecutive 75bp hike announced by Fed Chairman, Jerome Powell, taking the main financing rate to 2.5%.

The 75bp move was expected, however the messaging from Powell in the press conference that followed saw the US dollar fall across the board. Despite it looking like we will see another 50bp or 75bp raise at its next meeting in September, the path of rates thereafter has now been called into question given many believe that the US is teetering on the edge of recession. Powell advised that future moves would be data dependent and declined to give any further forward guidance like had been the case at previous meetings.

The Federal Reserve has a dual mandate of controlling prices and trying to maintain maximum employment. Given that inflation is at 9.1%, its highest level in over 40 years, the messaging from Powell indicated that he is more concerned with controlling prices, and that was interpreted by some that he may be willing to let the US economy slip into recession and allow the unemployment rate to tick higher in an effort to bring inflation back down to its 2% target.

Although another big move is likely in September, should we see poor economic data between now and then it may mean rate hikes trail off by year-end, especially if US economic growth does go into reverse. The next big data of note is due this afternoon with the first print of Q2 GDP which is expected to show anaemic 0.4% growth on an annualised basis. EUR/USD is back above 1.02 despite the ongoing concerns about the flow of gas from Russia into the eurozone.

Expected Ranges

  • GBP/USD: 1.2080 - 1.2280 ▲
  • GBP/EUR: 1.1870 - 1.2010 ▲
  • GBP/AUD: 1.7320 - 1.7500 ▲
  • EUR/USD: 1.0145 - 1.0300 ▲