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US dollar soars after Federal Reserve meeting

Daily Currency Update

GBP/USD dropped back under 1.35 yesterday evening as the US Federal Reserve indicated that it was prepared to raise interest rates several times this year in an effort to control inflation that is close to a 40 year high.

The pound had already lost ground recently on the back of market risk aversion over the Russia/Ukraine standoff, as well as ongoing uncertainty over Prime Minister Boris Johnson's future as we await the publication of a report by Sue Gray into potentially illegal Downing Street parties held during COVID-19 lockdowns. With Gray's report apparently being reviewed by lawyers before being made public should the investigation show Johnson broke the ministerial code in misleading MP's, or even broke the law then it could signal the end for the beleaguered PM.

If Johnson is forced from office, sterling dynamics will be interesting to note. Generally political uncertainty in the higher echelons of government are usually bad for a currency however it could actually benefit the pound as drawing a line under the issue could allow the normal functions of government to resume after the distractions of the past couple of months. GBP/USD has steadied around 1.3430 and the pound is actually higher versus the euro which has taken a battering since the Fed decision. GBP/EUR is making another play for 1.20.

Key Movers

Last night’s interest rate decision from the US Federal Open Market Committee saw no surprises re: policy changes, however the language from Fed Chairman Jay Powell sent shockwaves through stock markets around the world as he indicated rates will be raised in March and could be raised a few more times before year end. Powell has pretty much nailed on a 0.25% hike in interest rates at its March meeting with many predicting he could hike by 0.5%.

With a tight labour market and inflation way above its 2% target aggressive action is needed from the central bank to quell rising prices which are squeezing consumer spending power. It seems that every meeting for the rest of the year is now "live" meaning a rate hike or selling back some of the bonds bought during the pandemic could be announced at the remaining seven meetings of 2022. The median consensus is that we should see 4-5 hikes however inflation numbers and economic performance will be the factors that drive policy makers decisions.

Regarding economic performance we see the first estimate of 2021 fourth quarter growth from the US at lunchtime with a very solid annualised 5.3% growth predicted. All major stock markets are losing cash this morning with investors moving money from riskier assets into the usual safe haven assets, especially the US dollar which is higher across the board. AUD/USD which is a good bellwether of market confidence has dropped under 0.71, its lowest level since early December when the emergence of the Omicron variant was announced. EUR/USD is back under 1.12.

Expected Ranges

  • GBP/USD: 1.3370 - 1.3525 ▼
  • GBP/EUR: 1.1920 - 1.2030 ▲
  • GBP/AUD: 1.8855 - 1.9030 ▲
  • EUR/USD: 1.1140 - 1.1300 ▼