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Pound US Dollar (GBP/USD) Exchange Rate Slips Lower Thanks to Steady Fed Policy

Federal Reserve

Steady Federal Reserve Policy Leaves Pound US Dollar (GBP/USD) Exchange Rate in Slump

As the Federal Reserve opted to leave interest rates on hold at its January policy meeting the Pound Sterling to US Dollar (GBP/USD) exchange rate was left on the back foot.

Markets took encouragement from the Fed’s relatively optimistic assessment of the US economic outlook, with policymakers looking set to keep interest rates on hold.

With the central bank continuing to resist the political pressure brought to bear by the White House, which favours lower interest rates, the mood towards the US Dollar (USD) improved.

A general sense of market risk aversion also continued to buoy USD exchange rates as worries over the economic impact of the Wuhan coronavirus outbreak persisted.

As the global economy looks set to lose momentum thanks to the disruption the outbreak has already caused investors saw little reason to sell out of safe-haven assets on Thursday.

Bank of England Decision Set to Drive GBP Exchange Rate Volatility

Support for Pound Sterling (GBP) weakened, meanwhile, as anticipation for the Bank of England’s (BoE) policy announcement mounted.

With investors seeing roughly even odds of the BoE remaining on hold or following through on earlier dovish commentary to deliver an interest rate cut further volatility appears imminent.

If a majority of the Monetary Policy Committee (MPC) votes in favour of cutting interest rates the GBP/USD exchange rate could enter a sharper downtrend.

While January’s better-than-expected services PMI appeared to reduce the case for immediate action, though, economists at Deutsche Bank still see the case for a rate cut, noting:

‘UK growth has been below potential for nearly two years and recent survey data continue to point to weaker growth. Importantly, inflation remains below the Bank’s 2% mandate (CPI came in at a 3-year low of 1.3% in December), with core CPI and services inflation relatively weak in spite of elevated unit labour costs. In addition, Brexit uncertainty is here to stay.’

However, if the BoE opts to leave interest rates on hold for another month GBP exchange rates could return to a stronger footing in the short term.

Solid US Gross Domestic Product Forecast to Shore up US Dollar (USD) Gains

Demand for the US Dollar, meanwhile, looks set to remain elevated heading into the weekend thanks to the prevalent sense of market risk aversion.

With forecasts pointing towards a solid annualised fourth quarter US gross domestic product reading USD exchange rates could find additional support on Thursday afternoon.

While worries over the global growth outlook continue to mount evidence of greater US resilience may offer the US Dollar a solid boost against its rivals.

On the other hand, any indication that the world’s largest economy struggled to maintain its momentum in the final three months of 2019 could see the GBP/USD exchange rate rally.

Even with the Fed appearing prepared to remain on hold for the foreseeable future a weaker gross domestic product reading could encourage fresh criticism from the White House, leaving the US Dollar exposed to selling pressure.