Above: File image of Governor Waller. Image: Federal Reserve.
Pound Sterling hits a new 41-month high against the Dollar.
The British Pound rallies to new highs amidst easing global geopolitical tensions and renewed focus on the macro trends that are driving down the U.S. Dollar.
The Pound to Dollar exchange rate (GBP/USD) hit a new high at 1.3724 today, and in doing so breaks through an interim resistance zone located at approximately 1.3631.
As the chart shows, the level had provided a top on the exchange rate through the month of June, and technical lore suggests breakouts tend to be followed by a trend extension. This opens the door for a GBP/USD rally to 1.40 over the course of the next two months.
Above: GBP/USD at daily intervals.
According to analysts, the recent bout of U.S. Dollar selling is once again linked to President Donald Trump, who has indicated he will be announcing Jerome Powell's Replacement as Federal Reserve Governor as soon as September.
Dollar weakness suggests that markets are preempting the appointment of a Governor who is more favourable to 'looser' monetary policy, i.e. one that is willing to cut interest rates sooner and faster than under the current status quo.
There are two major implications for foreign exchange markets: 1) a lower interest rate path trajectory is naturally aligned with a weaker Dollar and 2) the credibility of the Fed and U.S. financial system will be questioned by a governor who is more amenable to Trump's wishes.
There's no question Trump wants lower interest rates, as this would juice the economy and improve his favourability with the electorate, and he has criticised Powell and the current Board of Governors for leaving interest rates unchanged over recent months.
"Trump could speed up naming a successor to Fed chair Jay Powell, a move that could considerably undermine Fed policymaking in the interim," says Neil Wilson, an analyst at Saxo Bank.
Above: File still of Scott Bessent, who is also in the running for Fed Chair. Image still courtesy of Bloomberg.
Powell is set to leave office in May 2026, but Wilson points out the naming of a successor as early as September "effectively creates a shadow Fed chair who could hold more sway with markets than the actual Fed chair. We are not in Kansas anymore."
Names being touted are current Governor Christopher Waller and Secretary of the Treasury, Scott Bessent. Bessent would be a clear political pick, while Waller was previously appointed by Trump.
Interestingly, Waller recently 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.
This 'dovish' communication was credited with Dollar weakness in our midweek GBP/USD report, and it could suggest Waller's current interest rate guidance is made with one eye on the top job.
National Economic Council head Kevin Hassett is also said to be in the mix, who, incidentally, said yesterday that the Fed has plenty of room to lower interest rates right now.
"Naming a 'shadow' Fed Chair is USD-negative as it risks undermining the Fed’s credibility," says Elias Haddad, Senior Markets Strategist at Brown Brothers Harriman.
The Federal Reserve issue is but one issue leaning against the Dollar, with other headwinds including the July and August tariff deal deadlines.
Add to this concerns about U.S. fiscal sustainability amidst a burgeoning debt bill. There's also the plan being touted to hit foreign investors with special taxes if they are from a country that is deemed to be treating the U.S. unfairly on trade.
Asian exporters are meanwhile allowing their currencies to rise against the Dollar, creating a powerful headwind for the Greenback.
"We may be entering a period of structural USD weakness as the Asian exporter community finally lets their currencies strengthen," says W. Brad Bechtel, Head of FX at Jefferies LLC.
Also, there appears to be increased demand for diversification by foreign investors who had previously invested heavily in U.S. assets. Europe, in particular, is looking more attractive now that the new German government wants to expand its investment in defence and infrastructure.
"Based on our forecasts for the underlying variables, we expect the indicator to turn negative this year and remain so until 2027," says a recent note from Oxford Economics.