Above: File image of Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.
The Pound to Dollar exchange rate (GBP/USD) is at 1.3631, up from Monday's low at 1.3369.
Cooling Middle East tensions and guidance from Federal Reserve Chair Jerome Powell have conspired to push the Dollar lower.
The ceasefire between Israel and Iran resulted in a plunge in oil prices and a rally in global equities, in turn erasing any safe-haven gains registered by the Dollar in recent days and putting GBP/USD on the cusp of fresh 2025 highs.
The advance was "almost immediately extended during Fed Powell’s hearing before the House financial committee," says analyst Mathias van der Jeugt at KBC Bank in Brussels.
Federal Reserve Chair Jerome Powell said the U.S. economy and labour market remain in a solid position, allowing the Fed to wait before considering rate moves, as he wanted to see whether tariffs were likely to push inflation up.
However, "Powell emphasised for the first time that lower inflation and/or a weakening labour market could mean an earlier rate cut," points out van der Jeugt.
Above: GBP/USD rises to meet the upper end of a recent range. The prospect of fresh 2025 highs now beckons.
The hint at an "earlier rate cut" echoes communications from fellow Fed members Michelle Bowman and Christopher J. Waller, suggesting a growing consensus that the central bank could afford to cut interest rates sooner rather than later.
Shifting expectations towards an earlier cut represent a classic headwind to the Dollar.
"The USD is very nervous about a Fed rate cut now it seems, as any time a Fed official mentions it we see a quick 20bps drop in the USD," says W. Brad Bechtel, Head of FX at Jefferies Bank.
Bowman this week called for an interest rate cut as soon as July, saying President Donald Trump’s trade war would have a smaller effect on inflation than some economists fear.
Waller said the Fed should not wait for the labour market to weaken. He said the Fed could act as soon as next month, citing the fact that its main reason for holding off, price increases from the president’s tariffs, may prove only temporary.
Egging GBP/USD higher was the contrast in tone from the UK's head central banker, Andrew Bailey.
Image © Pound Sterling Live, Still Courtesy of Bloomberg TV.
Bailey told members of the House of Lords that the UK labour market was "softening" and that slack was "opening up" in the UK economy. So far, so dovish.
However, he added, "my view is the path of rates is still downwards but it is going to be very gradual and very careful."
The commitment to "very gradual and very careful" reaffirms the predictable trajectory of one rate cut per quarter from the Bank, something that markets understand well.
The Pound's recent weakness has been attributed to softer domestic data and rising odds of an August rate cut. However, with August now 'in the price', the prospect for further GBP headwinds from Bank of England repricing fades.
With the outlook for UK interest rates set to remain stable, the repricing in the U.S. towards earlier and more rate cuts results in a divergence that translates into supportive tailwinds for GBP/USD.