Dollar weakens due to Trump's Fed nominee selection and a 'hawkish' interest rate decrease by the Bank of England
Fed and BoE Monetary Policy Shifts Shape Currency Markets
The Federal Reserve (Fed) and the Bank of England (BoE) have recently announced significant shifts in their monetary policies, with the Fed expected to implement up to three interest rate cuts during 2025, and the BoE cutting interest rates by 25 basis points to 4.0%.
According to market data, traders are pricing in a 93% chance of a rate cut in September with at least two rate cuts priced in by the end of the year for the Fed. The current outlook is that the Fed is expected to move policy from its current moderately restrictive stance closer to neutral to support labor market conditions.
In contrast, the BoE's recent rate cut and cautious approach regarding further cuts reflect concerns about UK growth slowing and persistent inflation pressures such as rising food and energy costs.
These divergent monetary policy trajectories significantly affect currency markets. The GBP/USD exchange rate is influenced by the contrasting stances, with the BoE's rate cut and cautious approach supporting the Pound's recent gains, while growing Fed rate cut expectations have made the US Dollar more dovish and somewhat capped its strength.
Specifically, the market movement around GBP/USD reflects anticipation of UK economic data and US labor market reports that could shift expectations of stimulus or tightening on either side. In broader terms, the Fed’s anticipated easing hints at looser financial conditions, which generally tend to weaken the US Dollar, whereas the BoE's cautious but near-term easing keeps Sterling relatively supported due to still elevated inflation that justifies rate cuts yet signals growth concerns.
In other news, the pound was nearly flat at US$1.3439 today, holding the previous session's gains and on course to clock its best weekly performance since late June. Against a basket of peers, the dollar is down nearly 0.7% on the week so far.
Elsewhere, the euro was perched near a two-week high as investors found comfort in the prospect of talks between the US and Russia aimed at ending the war in Ukraine.
The ongoing dynamic means currency traders focus on upcoming UK GDP releases and US employment data as key drivers for further shifts in GBP/USD and overall currency market reactions.
| Central Bank | Current Interest Rate Trend | Impact on Currency Markets | |--------------------|-------------------------------------|--------------------------------------------------| | Federal Reserve | Expected three rate cuts in 2025, next cut likely in Sept 2025 | Dollar weaker on easing expectations | | Bank of England | Recently cut 25 bps to 4.0%, cautious on further cuts | Pound supported amid economic concerns and inflation|
Sources:
- Bloomberg
- Reuters
- Financial Times
- The Guardian
- Malaysia's economy and finance minister has expressed concerns about global inflation, particularly in light of the recent monetary policy shifts by the Federal Reserve and the Bank of England.
- The Malaysian government is closely monitoring the impact of these shifts on the global economy, business, and general-news, as they could potentially influence the domestic economy and Malaysia's currency, the Ringgit.
- In response to these developments, local Malaysian politicians have been discussing potential strategies to manage the nation's economy and maintain financial stability, considering Malaysia's reliance on exports.
- Meanwhile, business groups in Malaysia are calling for greater fiscal stimulus to counteract any negative effects that global inflation and exchange rate fluctuations might have on their operations.
