Pound gains ground as dollar dips on Fed's signal
Dollar drops as Fed hints at lower rates. Bank of England holds steady. Pound sees a boost amid shifting currencies.
The dollar hit a four-month low today, following the Federal Reserve's hint yesterday that interest rates won't go higher, and that borrowing costs may be lower in 2024.
During Wednesday's FOMC meeting, Fed Chair Jerome Powell stated that the era of tightening monetary policy might be over. The U.S. dollar index fell to 102.27, its lowest since August 10, and ended 0.5% lower at 102.36. The market now predicts an 85% chance of a rate cut in March, up from around 65% a week earlier.
At home, the pound got a boost as the Bank of England made a "finely balanced" decision to keep interest rates steady.
Sterling GBP/USD rose by 0.8% against the dollar to $1.2776, reaching a 10-day high. This followed the Bank of England's decision to maintain interest rates at 5.25%, with a 6-3 vote. Policymakers Meg Greene, Jonathan Haskel, and Catherine Mann preferred a 25 basis points increase to 5.5%.
In the UK, inflation progress has been slower compared to other countries, with the Consumer Price Index (CPI) at 4.6%. The services CPI stands at 6.6%, justifying the Bank of England's decision. Governor Andrew Bailey noted that it's too early to discuss policy easing, pushing back against market expectations for cuts in 2024. This has given the pound a boost.
The bank's monetary policy stance will depend on incoming data, starting with next week's CPI figures.
