In the aftermath of the Federal Reserve’s interest rate announcement, the US Dollar rallied against the majority of its currency counterparts. GBP/USD weakness was limited however as Sterling broadly strengthened ahead of the Scottish referendum.
Although the Fed didn’t adapt its commentary on interest rates, as many industry experts had hoped it would, the central bank did increase its overnight loan target rate estimate for the end of next year to 1.375%. This was an increase from the figure of 1.125% provided in June.
In the opinion of industry expert Roger Bayston; ‘Getting from zero to 1.375 percent, you’re talking about some aggressive tightening that’s going to happen. Any increase in the Fed outlook for the fed funds rate should certainly be positive for the dollar.’
This action helped to counteract the adverse impact of the Fed’s continued use of dovish phrasing.
While some areas of the US economy are performing well, others are struggling and evidently the Federal Reserve remains concerned about the level of slack in the labour market. Just prior to the interest rate announcement the US had also published some disappointing inflation figures.
When speaking of the outlook for interest rates, the Fed consequently stuck to its previous assertion that they would remain around zero for a ‘considerable time’.
As said by Fed Chairwoman Janet Yellen; ‘To my mind the very slow pace of wage increases does reflect slack in the labour market. We had a very deep recession as is perhaps to be expected in the aftermath of a very significant financial crisis.’
The Fed decision was approved on a split vote of 8-2, with the President of the Fed Bank of Philadelphia (Charles Plosser) and the President of the Fed Bank of Dallas (Richard Fisher) offering the dissenting votes.
As expected, the central bank tapered quantitative easing by a further ten billion Dollars, leaving them on target to wrap the scheme up next month.
The US Dollar initially strengthened against almost all of its 16 main currency counterparts after the decision was announcement, with the Pound to US Dollar (GBP/USD) exchange rate falling to a low of 1.6247.
However, Sterling soon rallied against its North American peer as investors fixated on the UK’s upbeat employment figures, the divided Bank of England meeting minutes and the upcoming Scottish referendum.
With the majority of polls (and bookies) now foreseeing a ‘No’ vote, the Pound strengthened against its peers.
In the hours ahead investors will be focusing on the referendum, but the UK’s retail sales figures and the US jobless data could cause further movement in the Pound Sterling to US Dollar (GBP/USD) exchange rate.
UPDATE
The Pound managed to pull ahead against the US Dollar during the European session, as the final referendum poll put unionists marginally ahead.
Sterling extended its lead to 0.65% in spite of the fact the US published better-than-forecast initial jobless claims data.
Claims for first time unemployment benefit came in at 280,000 in September, less than the 305,000 forecast.
Other US data showed that housing starts and building permits both fell by considerably more than anticipated, sliding by -14.4% and -5.6% respectively.
With the outcome of the referendum due to be announced tomorrow morning, the GBP/USD pairing could still experience further movement.
