The US dollar has rallied overnight following the eagerly awaited Federal Reserve interest rate meeting.
The Fed surprised investors by signalling they might raise interest rates sooner than expected after they raised their growth and inflation forecasts. They’re now expected to make two rate hikes by the end of 2023 which contrasts heavily to March’s projections for no increase until 2024. There was also a larger number of Fed policymakers expecting to make a rate hike in 2022.
The Fed are now expecting growth (GDP) to hit around 7.0% this year (vs previous estimates of 6.5%) and inflation (CPI) to climb to 3.4% which is 1% higher that their last forecast. Although the Fed Chairman still feels the surge in inflation is “transitory”, the amplified hawkish tone from the Fed has made the dollar a lot more attractive to investors.
In other news, sterling gained some short-lived traction yesterday after UK inflation figures jumped above the Bank of England’s 2% target for the first time in nearly 2-years. However, recently the pound has lost some shine as the Delta variant of Covid-19 continues to spread and the government postponed “Freedom Day” by 4-weeks.
As a result, the GBP/USD has fallen around 1% from yesterday’s high and trades around a 5-week low. The EUR/USD has plummeted around 1.5% and now trades at the lowest levels since April this year. This large swing in the EUR/USD rate – with heavy flows moving out of the Euro and in the dollar – has helped to push the GBP/EUR rate up by a cent which has taken it to a 10-week high.