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- GBP/USD hits September lows after Powell's "neutral rate" comments.
- Powell says U.S. rates could rise above "neutral", drawing bid for USD.
- But GBP loss pared away quickly as market eyes Brexit developments.
The Pound fell back to September lows against the U.S. Dollar in Thursday's Asia session after Federal Reserve (Fed) chairman Jerome Powell appeared to hint interest rates could rise higher than many give the central bank credit for.
Powell told an audience at The Atlantic Festival that U.S. interest rates are still a "long way" off from the so-called neutral level, which is the point at which monetary policy becomes neither stimulative nor a burden on the economy.
He also said the Federal Funds rate could move beyond this neutral level, which is estimated to be between 2.5% and 3%.
"Interest rates are still acommodative, but we're gradually moving to a place where they will be neutral," Powell said in discussion with Judy Woodruff of PBS NewsHour. "We may go past neutral, but we're a long way from neutral at this point, probably."
Powell's comments prompted a renewed sell-off in American bond markets, which pushed the 10-year Treasury yield to a seven-year high above 3.2% Thursday, drawing a fresh bid for the U.S. Dollar. Investors must buy the Dollar in order to benefit from the higher rates now on offer in the U.S. bond market.
"The adjustment higher in US yields reflects increasing confidence amongst market participants that the Fed will continue to raise rates above 3.0% in the coming years which is more in line with their updated dot plot," says Lee Hardman, a currency analyst at MUFG. "His comments on the outlook for monetary policy added fuel to the fire."
Welcome back king yield! Our models have shown that after some time in the wilderness, yield is returning as a dominant driver of all things FX and there is only one G10 central bank with high yields that are still going higher! #DXY #AUD pic.twitter.com/Xi4jr4tasZ— Daniel Been (@beendan) 3 October 2018
The comments sent the U.S. Dollar index climbing by more than 50 points, back to its highest level since late August, while the Pound and Euro both fell back to September lows overnight.
Both Australian and New Zealand Dollars fell to fresh two-year lows and emerging market currencies all came under renewed pressure.
However, the Pound-to-Dollar rate was quoted 0.24% higher at 1.2969 during early trading Thursday while the Euro-to-Dollar rate also notched up a minor gain early on in the session.
"One of the main messages gleaned from the past two days was that the immediate risk of a leadership challenge seems to have diminished. It has provided some relief for the pound given fears running into the conference," says Hardman, referring to Pound Sterling's Thursday rebound.
America's Dollar is now up close to 4% for 2018 after having completely reversed what was once a 4% first-quarter decline.
Superior growth that has enabled the Fed to go on raising interest rates as other central banks sit on their hands has been the Dollar's greatest champion.
Powell's comments followed behind Septembers ISM non-manufacturing PMI, which measures activity and optimism among U.S. services companies.
The index rose to its highest level since the late 1990's in September as order books swelled and hiring in the sector surged. That further reinforced the analysts' upbeat views of the U.S. economic outlook.
"Yesterday's record 62.4 reading for the ISM employment component would ‘imply' a 500k increase in private sector jobs, which would be the best since 1983," says Kit Juckes, chief FX strategist at Societe Generale. "The underlying message is that the US economy isn't just in fine fettle, it's on fire."
Judging from the market reaction, investors appear to have taken a new message about rates from Wednesday's events. One that points to interest rates moving higher over coming years than they otherwise might have.
Either that, or markets are finally beginning to take note of the Federal Reserve dot-plot, as Wednesday's comments were little more than a run-through of the "dot plot" projections unveiled by the bank last week.
The Fed's dot plot of projections still envisages the Federal Funds rate peaking at 3.4% in 2020 although the projections now show the Fed expects to stop raising rates in 2020 after the benchmark reaches 3.4%.
In other words, considering where Fed officials see the neutral rate, the Fed can still raise rates "above neutral" for a period and not break the mould established by the dot-plot for September 2018.
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