The pound gained ground against the US dollar in early European trading on Wednesday, rising 0.4% to $1.2622. The uptick came as the currency rebounded from steep losses incurred late the previous day, following remarks from US Federal Reserve officials that sent the dollar surging. The Fed’s decision to remove two expected rate cuts from next year’s projections triggered the dollar’s climb.
The Fed’s move, which included a 25-basis-point interest rate hike, also saw policymakers adjust their 2024 rate expectations. They now predict only a 50bps reduction in borrowing costs next year — half the amount originally forecast in September. The changes fuelled an uptick in US government bond yields, which in turn made the dollar more attractive to investors.
Read more: FTSE 100 LIVE: Markets follow US lower as Bank of England expected to hold interest rates
“The market was blindsided by the surprising hawkishness,” said Steve Englander, head of global FX research at Standard Chartered.
“The market impact was particularly sharp because most of the market expected a really low volatility (Fed meeting).”
As traders recalibrated following the Fed’s update, attention in the UK now turns to the Bank of England (BoE). The central bank is expected to keep interest rates unchanged at 4.75% this Thursday, as persistent inflation continues to limit its policy options, even amid signs of a slowing economy.
Meanwhile, sterling remained largely unchanged against the euro (GBPEUR=X), trading at €1.2139.
Gold prices dipped on Thursday morning, extending the losses from a one-month low reading on Wednesday, following the Fed’s decision to lower interest rates as anticipated. However, the central bank also indicated it would slow the pace of future rate cuts, a move that helped strengthen the dollar and push up bond yields.
The spot gold price lost 1.2%, trading at $2,617.33, while gold futures fell 0.9% to trade at $2,628.60.
“Markets are climbing a wall of worry into the close as Powell nods to a period of slower rate cuts predicated on further progress in inflation. Core PCE data later this week now takes on more importance,” said Tai Wong, an independent metals trader.
Fed chair Powell emphasised that further reductions in borrowing costs would depend on continued progress in reducing inflation, which remains stubbornly high.
“The big question over here is that because Fed says they will still be data-dependent and if Trump’s policy starts to actually see inflation, a big risk would be that the Fed may not cut rates next year at all,” said Kelvin Wong, OANDA’s senior market analyst for Asia Pacific.
