Image: Federal Reserve.
Dollar slumps and then jumps in wake of Federal Reserve decision.
The pound to dollar exchange rate (GBP/USD) rose to its highest level since July after the Federal Reserve cut interest rates and committed to further reductions.
However, the bounce was cut short and the dollar soon roared back, squeezing GBP/USD back below pre-decision levels to 1.3632.
This sell-off meets the expectations conveyed in a number of articles we published ahead of the event, namely that we would see a 'buy the rumour, sell the fact' trade transpire.
Above: Pump and dump action in Sterling-dollar.
However, some analysts we follow reckon the dollar's recovery is not so much a case of trader profit-taking, but is rather down to communications from the Fed's post-decision press conference.
Robin Brooks, senior fellow at the Brookings Institution, says the Dollar's comeback is due to Fed Chair Jerome Powell's comment in the press conference that there was not widespread support for a 50bp cut at today's meeting.
"The early stages of this press conference are shaping up to be quite hawkish relative to the initial signal from the dots for 3 cuts in 2025," says Brooks.
Interestingly, he also said, "I don't think we can say," that policy no longer warrants a restrictive policy. Again, hardly the green light to a bunch of further cuts.
Furthermore, Powell painted the cut as an "insurance" move, implying it was to offer the labour market some security as opposed to the commencement of a full-blown rate cutting cycle.
Ahead of the comments, the dollar tumbled in response to news that the Fed had cut interest rates and updated its forecasts to show that the majority of the committee was now plotting further interest rate cuts.
Conveying these expectations is the Dot Plot chart. The updated chart shows that the median estimate for rates for this year had been revised down to 3.625% from 3.875%in June
With forward guidance pointing in a dovish direction, markets were prompted to price an additional 2.5 cuts by the end of the year, which weighed on the dollar and lead to the initial GBP/USD spike.
"For the time being, the Fed’s plan is merely to push on with policy normalisation, which – according to the dots – will take the Fed funds rate back to 3%," says Dario Perkins, an economist at TS Lombard.
The dollar could recover further from here as the 'sell the fact' trade runs a little.
However, with the Fed commencing a rate cutting cycle, there is clearly scope for an extension of 2025's selloff and GBP/USD should test the 2025 high at 1.3787 before long.
"The bottom line is that the Fed’s reaction function has shifted in a more dovish direction, meaning that a continued deceleration in the economy will lead to further easing—even if inflation remains too hot for comfort," says Karl Schamotta, Chief Market Strategist at Corpay.