The Pound to US Dollar exchange rate (GBP/USD) weakened by around -0.3 cents to 1.5560 last night as the Federal Open Market Committee (FOMC) mentioned that it is willing to “reduce” as well as “increase” the pace of its quantitative easing scheme. The Fed also opted to maintain its current record low 0.25% benchmark interest rate.
Traders had anticipated a slightly more dovish response from the Federal Reserve in light of recent softness in US economic data: Gross Domestic Product printed 0.5% below forecasts at 2.5% in Q1; Non-farm Payrolls improved by less than half as much as expected in March, inflation fell to 1.2% in March, and ADP Employment Change decelerated to 119,000 in April. The US Dollar benefitted from relief rallies because the FOMC statement did not bring up any new, direct, enhancements to risk sentiment. Simultaneously, the meeting did not offer any fresh, immediate, disincentives to invest in US Treasury bonds.
However, it is possible that the US Dollar will weaken in response to the report over the next few days due to a slight change in remit. The Fed stated that it is prepared to “increase or reduce the pace of its purchases to maintain appropriate policy accommodation”. This is the first time that alterations have been explicitly mentioned in relation to economic indicators, meaning that future downbeat data releases will probably inflict amplified damage on demand for the Dollar. Subsequently, this Friday’s Non-farm Payroll report will come under intense scrutiny; a bad result could lead to further gains for Sterling against the ‘Greenback’.
Yesterday’s soft ADP Employment figures do not bode well for the Non-farm report and contributed to Sterling hitting a fresh 2.5-month high of 1.5606 (GBP/USD).
The Fed pledged to continue with its programme of buying $40 billion per month of mortgage-backed securities and $45 billion per month of long-term Treasury securities. The Committee classed the current pace of economic expansion as “moderate” and criticised the recent ‘sequestration’ for “restraining economic growth”. Indeed, US economic indicators have stuck a decidedly softer note since the latest spending cuts kicked in at the beginning of March. In response to last week’s disappointing GBP score, Chief White House Economist Alan Kreuger said:
“It is likely that the contraction in Federal defense and non-defense spending, at least in part, reflects the onset of sequestration”.
The next major release on the event horizon is this afternoon’s rate decision from the European Central Bank. The ECB is forecast to reduce its benchmark interest rate from 0.75% to a fresh record low 0.50%, as inflation remains fragile within the currency bloc, and all-time high Unemployment figures point towards increased economic downturn. A move of this nature will likely fuel risk appetite and therefore impact demand for the safe haven US Dollar.
GBP/USD has the potential to rise towards resistance levels at 1.5772, and if by the end of the week interest rates haven been reduced in the Eurozone, and the US Non-farm Payrolls report fails to impress, then there is every possibility that Sterling could strengthen against the US Dollar.
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