Sterling enjoyed a short – but significant - fillip following the Fed's surprise inaction on Wednesday, but the U.K.'s bumpy economic recovery soon put paid to the currency's spike.
The pound staged its largest gain against the dollar in three years on Wednesday, after the U.S. Federal Reserve defied expectations by keeping its stimulus program intact.
Analysts had been expecting the central bank to cut its $85-billion-per-month bond-buying program by at least $10 billion. When the Fed's inaction came, the dollar – considered a safe investment in times of economic turmoil – was hit hard. The Fed's continuation of its stimulus program at its current level boosts risk sentiment, and investors keen to get better returns fled the greenback and piled into currencies like the pound.
The market reaction was "fast and furious," according to Forex.com's research director Kathleen Brooks. Sterling rose above $1.60 – to a high of $1.6183 - for the first time since January, and the euro reached levels not seen since February of around $1.3569.
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"The U.S. dollar has weakened sharply across the board following the unexpected decision by the Federal Reserve yesterday not to begin to taper QE (quantitative easing)," said Lee Hardman, currency analyst with Bank of Tokyo-Mitsubishi, in a note on Thursday. "While it remained a close call… the decision came as a big surprise given that the Fed had signaled no discomfort with the consensus view in the market of likely modest tapering heading into the meeting."
This decision not to scale back its stimulus measures had allowed the higher-risk currencies to most notably extend their recent rebounds against the U.S. dollar, Harman added.