British Pound hits three-week highs near 1.3350 as the US Dollar tumbles

The British Pound (GBP) appreciates against a weak US Dollar (USD) on Friday as risk appetite improves, with global yields pulling back from highs, and investors reprice Federal Reserve’s (Fed) monetary tightening bets. The GBP/USD has rallied more than 1% over the last two days, breaching the top of the last three weeks' range and hitting session highs at 1.3349 so far.

Investors are selling the US Dollar across the board, following comments by Fed officials earlier this week, hinting at a pause at October's Federal Open Market Committee (FOMC) meeting, as the bank needs more time to assess the economic impact of September’s rate hike.

Fed's Warsh fails to clarify the bank's near-term path

The Federal Reserve Chairman, Kevin Warsh, spoke at the International Monetary Fund (IMF) forum in Bangkok earlier on Friday, but did little to clarify the Fed’s next moves. Warsh sounded optimistic regarding the economic outlook and reaffirmed the bank’s commitment to bring inflation to target, but he refused to give any hints about a monetary tightening cycle.

According to DBS analysts, "the USD’s failure to sustain gains following the upside CPI surprise raises questions about the durability of its rally." The bank affirms that "the reversal in Treasury yields and in Fed hike expectations suggests that investors are mindful of growth and earnings risks from further tightening."

UK data feeds hopes of a near-term BoE rate hike

In the UK, data released this week was supportive for the Pound. The monthly Gross Domestic Product (GDP) showed that the economy grew unexpectedly in August, fuelled by a strong performance of the industrial sector, which supports the idea that the Bank of England might raise interest rates in the coming months.

The Bank of England's (BoE) Governor Andrew Bailey, however, failed to confirm those hopes. Bailey said at the International Monetary Fund meeting in Bangkok that it is “too early to form strong views on the strength of 2nd round effects (on inflation)” and that signs of those effects are “subdued”, suggesting limited immediate pressure for aggressive tightening. 

His speech was scored at 6.2/10 by FXS Speechtracker, slightly below his historic 6.4/10 baseline. The impact of these comments on the Pound was marginal.

Usd rally questioned as Fed tightening risks meet growth concerns

"Overall, the USD’s failure to sustain gains following the upside CPI surprise raises questions about the durability of its rally," according to DBS analysts. The bank affirms that "the reversal in Treasury yields and in Fed hike expectations suggests that investors are mindful of growth and earnings risks from further tightening," reinforcing the sense that markets are increasingly focused on the potential economic and corporate fallout of additional policy restraint.