As I predicted yesterday GBP/USD exchange rates did fall back below the $1.66 mark. Last night the U.S. Federal Reserve announced that a further $10 billion will be cut from the current stimulus package, meaning they have now trimmed the bond buying programme for three consecutive months.
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The news had an immediate impact on the FX markets, Sterling fell from $1.6665 to $1.6625 in matter of minutes and the dollars gains did not stop there. As the UK and European markets opened and had a chance to react, GBP/USD fell even further and reached a low of $1.6485 by lunch time today.
It wasn't only the news of further tapering which helped the dollars cause though. Fed Chair Janet Yellen also helped support the dollar by issuing some guidance in regards to a potential interest rise. Under former Chairman Ben Bernanke the Fed came across as cagey about when a rise would take place, but thanks to Mrs Yellen's comments she has now set some clear parameters about when the first increase will take place. During her statement Mrs Yellen indicated that interest rates could rise as soon as the current stimulus package has been wound up, this could mean we may see a rate hike in just six months time.
Now that some guidance has been issued I think the dollar has a real chance of making further gains. If we cast our mind back to last year to when Bank of England Governor Mark Carney employed a similar policy, the pound benefited hugely from improved investor confidence and went on a real march. There is now a real possibility that the dollar will follow suit and if that happens it might not be to long until we see GBP/USD back under $1.60.
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