GBP/USD surges above 1.3400 as threat to Fed’s independence batters US Dollar
- GBP/USD jumps above 1.3400 as US President Trump’s threat to remove Fed Powell has dampened the US Dollar.
- Donald Trump slams Fed Powell for not reducing interest rates.
- This week, the Pound Sterling will be influenced by the S&P Global/CIPS PMI and the Retail Sales data.
The GBP/USD pair rallies to near 1.3400 during European trading hours on Monday, the highest level seen in seven months. The Cable strengthens as the US Dollar (USD) has been battered by the threat to the Federal Reserve’s (Fed) independence after United States (US) President Donald Trump.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is down over 1% to a fresh three-year low near 98.00.
Donald Trump has slammed Fed Powell for continuing to support a “wait and see” approach on the monetary policy until getting greater clarity over how the new tariff policy will shape the economic outlook. Trump has expressed dissatisfaction over Powell’s stance on the monetary policy outlook and has signalled that he can remove him at any time.
The Fed really owes it to the American people to get interest rates down. That’s the only thing he’s good for," Trump said. "I am not happy with him. If I want him out of there, he’ll be out real fast, believe me." Trump said on Friday.
Meanwhile, trade tensions due to the announcement of reciprocal tariffs by US President Donald Trump have kept the US Dollar on the backfoot for the last three months. Despite Trump's announcement of a 90-day pause on the imposition of reciprocal levies, the uncertainty over the global economic outlook, including the US, remains intact.
In the United Kingdom (UK) region, soft Consumer Price Index (CPI) data for March and global uncertainty have paved the way for an interest rate cut by the Bank of England (BoE) in May’s policy meeting. Such a scenario will be unfavorable for the Pound Sterling (GBP).
In the Financial Policy Committee (FPC) of the current month, the BoE warned that a major shift in “global trading arrangements” could harm “financial stability by depressing growth”.
This week, investors will focus on the preliminary S&P Global/CIPS Purchasing Managers’ Index (PMI) data for April and the Retail Sales data for March, which will be released on Wednesday and Friday.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.