Pound to Dollar Rate Pressured As Fed Pushes Back Rate Cut Timing

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Pound Sterling will remain under pressure against the U.S. Dollar for some time say analysts following the Federal Reserve's policy update and guidance that suggests a first interest rate cut in 2024 will come later than previously expected.

The Fed kept interest rates unchanged as expected, but it was always going to be about the guidance; specifically whether another rate hike was likely in 2023 and when a first cut would fall.

"USD built on its FOMC gains," as market participants interpreted yesterday’s FOMC meeting as a 'hawkish' pause, explains analyst Kristina Clifton at Commonwealth Bank.

The updated projections from the Fed showed board members retain a forecast of one more 25bp hike before year‑end, while they trimmed the 2024 rate cut scenario from 100 basis points of cuts seen in June to 50bp of cuts.

The Fed Funds futures market has now pushed back its pricing for the first 25bp cut to September 2024.

"The prospect of high for longer interest rates can keep the USD bid in the near term," says Clifton.

The Pound to Dollar exchange rate ended the day 0.40% lower at 1.2343 and is seeing further weakness on Thursday with a new six-month low being tested at 1.2304.

Elsewhere, the Euro is testing its lowest levels since March at EURUSD 1.0616.

"The outcome was about as hawkish as the Fed could have engineered without actually delivering a surprise hike," says Stefan Mellin, Chief FX Analyst at Danske Bank.

The Fed's dot plot chart shows where individual members of the FOMC see interest rates over the coming months, offering the market a clear forecast for interest rates.

The latest chart shows the median of dots showing the FOMC now expects the Fed Funds rate to be 5.6% by the end of this year, unchanged from June, and 5.1% at the end of 2024, up from 4.6%. The below summarises how the median projection has steadily risen, with a notable lift seen in 2024 in the most recent update:

Above: Comparison & History Of Past Projections, image courtesy of UOB.

It is seen at 3.9% at the end of 2025, up from 3.4%. The new 2026 dot is 2.9%. The long-term projection is unchanged at 2.5%.

Chairman Jerome Powell's press conference was largely as expected as he said the FOMC would remain ready to react to the incoming data.

"The most interesting part was perhaps his mention of the possibility of a higher neutral rate, which re-initiated the hawkish market reaction," says Mellin. "Overall, the main message from the Fed was that rates could stay higher for longer."

For now, this can keep the U.S. Dollar supported.