Federal Reserve Sees Just One Interest Rate Cut in 2024

Above: File image of Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.

The Pound to Dollar exchange rate's rise to levels above 1.28 proved fleeting, and it has since given back recent gains, with the Federal Reserve decision playing a part in the move.

The exchange rate rose on Wednesday following softer-than-forecast U.S. inflation figures, with the push extending to 1.2859, its highest level since March 11.

Following news inflation flatlined in May, the market moved to price two rate cuts from the Federal Reserve in 2024, starting in September, which prompted a weaker Dollar.

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But the Dollar recovered after new forecasts from the Federal Reserve disagreed with the market's assessment and showed we should expect just one interest rate cut in 2024.

"Driving that recovery was yesterday's FOMC meeting and press conference, where it seemed that the main message from Chair Powell was that inflation forecasts were being revised higher and the Federal Reserve easing cycle could be delayed - according to the median Fed expectation," says Chris Turner, head of FX research at ING Bank.

The subsequent fall in Pound-Dollar is interesting from a technical perspective as it reinforces the presence of what looks to be a solid area of resistance, plonked directly on the round 1.28 figure:

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The level could stymie those looking for a stronger Dollar in the coming days, and we see the most competitive providers are offering payment rates in the 1.1786 area.

To be sure, the broader technical setup in Pound-Dollar remains constructive as it trades above its main moving averages, but the Federal Reserve has turned the RSI lower, hinting at a period of consolidation.

The focus was always going to be on the projections made by each member of the Federal Reserve Open Market Committee (FOMC) regarding where they expect interest rates to move: in March, the median forecast was for three rate cuts this year; in June, it was only one.

This 'hawkish' shift supports the Dollar, but given the softer-than-forecast inflation numbers, we wonder if the FOMC can get any more 'hawkish' from here.

This is an important consideration: for the USD to strengthen materially, the Fed must move the dial from one 2024 cut to zero.

"If the economy were to cool down more sharply in the second half of the year and inflation rates were to fall at the same time, the way would be clear for interest rate cuts, as forecast for this year. However, the economy has repeatedly surprised on the upside recently, so it cannot be ruled out that interest rates will not be cut this year," says Dr. Thomas Gitzel, Chief Economist at VP Bank.

U.S. economic data has been mixed, with pockets of solid and disappointing readings offering a contradictory picture.

Wednesday's inflation report is the clincher, however, as it suggests the disinflationary process is back on track, having stalled in the first half of the year.

Core CPI prices rose 0.2% m/m in May, which was one notch below consensus and the April report, indicating a return to mild price pressures for the second straight month.

The inflation print, "along with a gradually softening labour market trend, keeps the door open for a September cut, which is when we have pencilled in the Fed's first cut," says Ali Jaffery, an economist at CIBC.

If the market becomes increasingly confident of a September cut in the coming weeks, expect Pound-Dollar to crack the 1.28 ceiling.