PoundSterlingLIVE - Above: File image of Jerome Powell. Image: Federal Reserve.
The Dollar fell on the day the Federal Reserve and Bank of England cut interest rates by 25 basis points.
The cuts were anticipated by a market that was finding its feet following the unexpectedly decisive U.S. election result that favoured Donald Trump and his Republican Party.
"The USD gave back part of the rally that took place following Mr. Trump’s victory in the US presidential election," says Roberto Mialich, a currency strategist at UniCredit (LON:0RLS) Bank.
The Pound to Dollar exchange rate rose to a high of 1.3009 after the Bank of England cut Bank Rate by 25 basis points to 4.75%. The Fed cut the federal funds rate by 25 basis points to 4.50-4.75%.
"The greenback was not helped by hawkish remarks by BoE Governor Andrew Bailey either, as he warned that the bank might not cut rates too quickly or too much, which helped GBP-USD re-approach the 1.30 area," says Mialich.
Analysts expect the Bank of England to continue cutting interest rates at a quarterly pace, meaning the next cut will likely occur in the first quarter of 2025 (at the February meeting).
On the other hand, Fed Chair Powell wouldn't be drawn into when the Fed might cut rates again.
He said a December interest rate cut would depend on data in the next six weeks.
Regarding the U.S. election, Powell was adamant the result would have "no impact" on Fed policy in the near term.
"So long as the labour market continues to show signs of gradual cooling and inflation remains contained, we think the Fed will probably cut by 25bp in December," says Mialich.
The Dollar strengthened through October as investors braced for a Trump victory but also because U.S. economic data showed the economy remains strong.
This allowed markets to materially lower expectations for further interest rate reductions for 2025, which is fundamentally supportive of the U.S. Dollar.
Economists at Nomura forecast that the Fed will make another rate cut in December, followed by just one in
2025 and two in 2026.
"This is a somewhat more hawkish scenario than what the federal funds futures market is currently pricing in, and if it comes to pass, we could see some unwinding of some of the forces that have pushed equities up since July 2024," says Tomochika Kitaoka, a strategist at Nomura.
Foreign exchange analysts we follow say the Dollar might remain supported into year-end as the 'Trump trade' continues to play out. This involves expectations for higher inflation rates in the U.S. on account of Trump's desire to impose import tariffs and cut taxes.
The Fed will meet these policies by keeping rates on hold for an extended period.
"A less dovish Fed stance that could burnish the rate appeal of the USD," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.
The prospect of further USD appreciation and GBP/USD downside remains high in the coming weeks.
"In all, we expect the USD to remain supported in the early stages of Trump’s presidency but to lose ground in H225 as the US relative growth advantage is gradually eroded and Fed cuts mount while Trump’s weak-
USD doctrine persists," adds Marinov.
An original version of this article can be viewed at Pound Sterling Live