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The US dollar is seeing increased demand at the start of the new month and quarter, buoyed by the latest guidance from federal Reserve Chair Jerome Powell regarding US interest rates. Powell indicated on Monday that the Fed anticipates implementing two more interest rate cuts by the end of 2024, which is fewer than the market had previously expected. Consequently, this new guidance has exerted downward pressure on the GBP/USD currency pair, pushing it below its 2024 highs to 1.3242 at the time of writing on October 1st.
Commenting on the performance and influencing factors, Achilles Georgopoulos, investment analyst at XM, stated:“The US dollar has reacted positively to Powell's comments and gained ground across the board.”
Prior to Powell's statement, the market had been anticipating a more aggressive rate cut of up to 70 basis points for the remainder of the year. However, this new guidance from the Chair suggests that the financial markets should adjust their expectations to anticipate two additional 25 basis point moves. According to analysts at ING Bank, "Powell explicitly rejected a 50-basis point rate cut by the end of the year."
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Increasingly, financial markets have been bold in their thinking that the Fed will cut rates quickly now, which would boost the US economy, lower bond yields and pressure the US dollar. According to analysts, Powell said the base case was for two 25 basis points moves by year-end, an unusually specific guidance that suggests his displeasure with the market's dovish pricing.
For their part, Goldman Sachs analysts say the US economy is still producing“relatively strong activity data” and“recent labor market news has been relatively encouraging.” Given this, Kamakshya Trivedi, Goldman Sachs FX analyst, says,“The recent trend of selling the US dollar on all sorts of news seems unsustainable.”
Nevertheless, Powell's message is not entirely clear-cut, and it's not unusual for markets to debate a 25-basis point rate cut given the broader evidence pointing to a larger interest rate cut in the coming months. Therefore, the comments do not represent a shift in the declining trend of the US dollar, and the path of least resistance for the GBP/USD remains higher, albeit likely at a slower pace with deeper pullbacks along the way forecasts for the GPB/USD pair today:
Overall, the upcoming US jobs report on Friday will be crucial in this regard. A reading that exceeds consensus expectations could reinforce the notion that the Fed will need to proceed slowly with interest rate cuts. If this view becomes more entrenched, it could lead to a period of GBP/USD weakness. With the pair trading below the 1.3350 level, technical forecasts indicate a bearish bias in the near term, especially after failing to establish itself above the 1.3400 level. The 1.3145 support level will remain key to the bears' dominance over the trend. In general, traders will be closely monitoring upcoming US data and Fed comments for potential shifts in sentiment. Decisively, the US dollar is likely to remain supported if the data confirms the Fed's cautious but steady approach to monetary policy.
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