The pound remains close to an eight-month high after the dollar slipped following the release of the much-anticipated Federal Reserve’s minutes from the interest rate setting committee meeting in May. Prior to the release of the meeting minutes, the pound US dollar exchange rate was hovering around the low for the day of $1.2920 and has since moved higher to $1.2975, although still shy of the day’s high of $1.2994.
The Federal Reserve minutes showed policy members agreeing to a hike “soon”, but that they’d hold off hiking interest rates until they had evidence showing that the recent weakness in economic data was temporary. In short, the minutes showed the Federal Reserve isn’t going to rush into raising interest rates further until economic data starts to improve.
Interest rates rule the Forex market. Currencies representing economies with higher interest rates, at least expectations for higher interest rates, tend to be stronger than currencies representing economies with lower interest rates. Investors are always looking for the greatest possible return on their investments. As a result, economies with higher interest rates usually have higher yields on their investments which attracts more overseas capital looking for better returns. In order to invest, local currency is needed. Thus increasing the currency’s demand, pushing its value higher.
Interestingly, though the dollar slipped following the minutes, it hasn’t tumbled. This is because despite the comments, investors are still expecting an interest rate hike. According to the CME FedWatch tool, the probability has remained steady at 83%. However, expectations for two more rate cuts have dropped marginally to 46% from 50% prior. Overall the market doesn’t seem overly concerned by the Federal Reserve’s comments and, for that reason, the dollar hasn’t sold off in a big way. On the other hand, strong economic data will need to start coming through soon.
The pound on the other hand, has remained fairly subdued throughout the day. There has been no influential economic data releases and political campaigning for the upcoming general election has been suspended following the horrific terrorist attack in Manchester.
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