The Pound US Dollar (GBP/USD) exchange rate was supported by the expectation of lower interest rate rises from the Federal Reserve in the future.
At the time of writing, GBP/USD was trading at around $1.2294 – a five-month high – which was up roughly 1.6% from this morning’s opening rate.
The US Dollar (USD) was down against the majority of its peers on Thursday as Fed Chairman Jerome Powell signalled a slower pace of interest rate rises.
On Wednesday evening, Powell announced that the Fed would start pursuing smaller interest rate hikes as early as December. This comes as the Fed’s aggressive monetary policy tightening has begun to bring down inflation.
‘[I]t makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down’.
These comments saw markets scale back their rate hike expectations, triggering a sell-off in the US Dollar.
Thursday’s data releases added to the downside. The core PCE price index, which is the Fed’s preferred measure of inflation, dropped from 5.2% to 5% in October. Also, the ISM manufacturing PMI printed weaker than expected. The figures were forecast to drop from 50.2 to 49.8, but fell to 49, signalling a larger-than-forecast contraction in US factory activity. 
The data supports the Fed’s decision to enact smaller interest rate hikes as inflationary pressures begin to ease in the US and the economy slows down. Markets further reined in their expectations for future interest rate rises, sending the Dollar crashing to a five-month low.
Meanwhile, the Pound (GBP) rallied on the Fed’s news, strengthening against the majority of its peers.
As the Fed begins to reduce the rate of hikes, GBP investors are hopeful this could lead to a shallower recession in the UK. Previously, there were concerns that if the Fed continued its pace of monetary policy tightening it would further squeeze the UK economy.
The British economy has become particularly vulnerable to external shocks in recent months, so the Fed easing interest rate rises has raised hopes that the UK’s economic outlook may improve. Smaller rate hikes in the US could help cool the UK’s inflation rate and reduce the costs of government borrowing, potentially lessening the severity of an economic downturn.
Also supporting investor optimism and the Pound was the fact that the UK’s manufacturing PMI printed better than the preliminary results. Final figures rose from 46.2 to 46.5. Despite the manufacturing industry being in contraction, the data signalled to investors that the current economic worries may not be as bad as feared.
In addition, GBP/USD enjoyed the upbeat market mood inspired by softer Fed expectations, as investors favoured the risk-sensitive Pound over the safe-haven US Dollar.
Looking ahead, the Pound US Dollar exchange rate will likely be driven by key jobs data from the US on Friday.
Both the non-farm payrolls report and the country’s unemployment rate will print. Non-farm payrolls figures are expected to decrease in November, from 261,000 to 200,000. If forecasts are correct, then the cooling job market could feed into expectations of slower Fed rate hikes and weigh on USD.
Meanwhile, the unemployment rate is expected to hold at 3.7% in November. If this prints true, this could potentially limit the downside from the payrolls figure. However, if unemployment increases again, like it did in October, the ‘Greenback’ could be dented.
Turning to the UK, a lack of impactful data on Friday could see investors focus on domestic headlines. Any news pertaining to the cost-of-living crisis could weigh on the Pound. Otherwise, Sterling could move in line with market sentiment.
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