British Pound hits three-week highs near 1.3350 as the US Dollar tumbles
- GBP/USD rallies beyond 1% over the last two days to hit a fresh three-week high near 1.3350.
- Dovish comments by Fed officials and lower US Treasury yields have hammered the US Dollar.
- The Pound has drawn support from strong UK economic data this week.
The British Pound (GBP) appreciates against a weak US Dollar (USD) on Friday as risk appetite improves, with global yields pulling back from highs, and investors reprice Federal Reserve’s (Fed) monetary tightening bets. The GBP/USD has rallied more than 1% over the last two days, breaching the top of the last three weeks' range and hitting session highs at 1.3349 so far.
Investors are selling the US Dollar across the board, following comments by Fed officials earlier this week, hinting at a pause at October's Federal Open Market Committee (FOMC) meeting, as the bank needs more time to assess the economic impact of September’s rate hike.
Fed's Warsh fails to clarify the bank's near-term path
The Federal Reserve Chairman, Kevin Warsh, spoke at the International Monetary Fund (IMF) forum in Bangkok earlier on Friday, but did little to clarify the Fed’s next moves. Warsh sounded optimistic regarding the economic outlook and reaffirmed the bank’s commitment to bring inflation to target, but he refused to give any hints about a monetary tightening cycle.
According to DBS analysts, "the USD’s failure to sustain gains following the upside CPI surprise raises questions about the durability of its rally." The bank affirms that "the reversal in Treasury yields and in Fed hike expectations suggests that investors are mindful of growth and earnings risks from further tightening."
UK data feeds hopes of a near-term BoE rate hike
In the UK, data released this week was supportive for the Pound. The monthly Gross Domestic Product (GDP) showed that the economy grew unexpectedly in August, fuelled by a strong performance of the industrial sector, which supports the idea that the Bank of England might raise interest rates in the coming months.
The Bank of England's (BoE) Governor Andrew Bailey, however, failed to confirm those hopes. Bailey said at the International Monetary Fund meeting in Bangkok that it is “too early to form strong views on the strength of 2nd round effects (on inflation)” and that signs of those effects are “subdued”, suggesting limited immediate pressure for aggressive tightening.
His speech was scored at 6.2/10 by FXS Speechtracker, slightly below his historic 6.4/10 baseline. The impact of these comments on the Pound was marginal.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Usd rally questioned as Fed tightening risks meet growth concerns
"Overall, the USD’s failure to sustain gains following the upside CPI surprise raises questions about the durability of its rally," according to DBS analysts. The bank affirms that "the reversal in Treasury yields and in Fed hike expectations suggests that investors are mindful of growth and earnings risks from further tightening," reinforcing the sense that markets are increasingly focused on the potential economic and corporate fallout of additional policy restraint.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
