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Pound v US dollar: GBP slips as US Fed’s Dudley points to FOUR rate hikes this year

Pound v US dollar: GBP slips as US Fed’s Dudley points to FOUR rate hikes this year

Anticipation has steadily built over an earlier-than-expected rate hike this year after Jerome Powell, Chairman of the US Federal Reserve, expressed optimism about the state of the US economy in his Congressional testimony.

Mr Powell had called for “gradual” rate hikes this year, terminology that New York Federal Reserve President William Dudley has now asserted could mean four rate hikes this year, rather than three.

Speaking at a Sao Paulo conference Mr Dudley stated: “If you were to go to four, 25-basis-point rate hikes I think it would still be gradual.”

Previous Fed forecasts had pointed to three expected rate hikes this year.

Although developing fundamental strengths such as record low unemployment levels, surging business optimism on US President Donald Trump’s sweeping tax reform, steadily accelerating wage growth and higher-than-expected consumer prices have all combined to convince investors that more are likely.

This news helped distract the markets from recent trade war talk, giving further purchase to the US dollar and pressurising the pound.

Lacking much in the form of notable data releases, markets continue to focus on Brexit negotiations for Sterling.

EU Council President Donald Tusk’s speech took centre stage yesterday.

Investors were rocked somewhat by his assertions that UK Prime Minister Theresa May’s trade proposal was “cherry picking” and not viable.

He went on to claim that the UK would have to choose a basic trade agreement akin to Canada’s if it wants to avoid remaining part of the customs union, single market, and under the jurisdiction of the European Court of Justice (ECJ).

Mr Tusk also asserted that the EU would seek to maintain "existing reciprocal access to fishing waters”.

This is an outlook in direct conflict with May’s Mansion House speech, where she claimed: “The UK will regain control over our domestic fisheries management rules and access to our waters.”

Ultimately, markets continue to remain sensitive to uncertainty regarding the UK’s post-Brexit future, and with impasses failing to clear, investors were quick to flee to other currencies.

Looking ahead, Sterling’s prospects could grow increasingly positive as we move towards May, with markets also expecting the Bank of England (BoE) to move hawkishly should data between then and now not prove disappointing.

Keep an eye out for tomorrow’s UK trade balance figures, as well as the industrial production, manufacturing production and construction output readings for January, all notable releases that could give Sterling a shot in the arm or leave it floundering against the dollar.