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Could a Dovish Fed Propel GBP/USD Exchange Rate to New Seven-Month High?

GBP/USD Exchange Rate Wavers ahead of Fed Rate Decision

The Pound US Dollar (GBP/USD) exchange rate is on the back foot this morning as a cautious market mood prevails ahead of the Federal Reserve’s latest interest rate decision.

At the time of writing the GBP/USD exchange rate is trading at around $1.2319. Down roughly 0.3% from this morning’s opening rate.

US Dollar (USD) to Slump as Fed Continues to Slow Pace of Rate Hike?

The US Dollar (USD) is buoyed by a risk-off impulse this morning, but the currency’s upside potential appears limited as USD investors brace for a key interest rate decision from the Fed on Wednesday.

The Fed is widely expected to deliver a 25bps rate hike following its first policy meeting of 2023. Having previously slowed the pace of its hikes with a 50bps increase in December, another moderation of the bank’s monetary policy may stoke expectations the Fed is nearing the end of its current tightening cycle.

This could lead the US Dollar to come under heavy selling pressure, and potentially lead the GBP/USD exchange rate to refresh its recent high.

On the other hand, recent US employment data has proven to be much stronger than expected. Robust employment growth and accelerating wage growth could be a reason for Powell to strike a more hawkish tone.

If the Fed reaffirms its commitment to continue raising interest rates in the coming months and downplays speculation the bank might begin cutting rates in late 2023 the US Dollar may rise.

Pound (GBP) Subdued Following IMF Growth Warning

The Pound (GBP) is struggling to hold its ground this morning after the International Monetary Fund (IMF) warned the UK will be the only major economy to shrink in 2023.

The IMF forecasts the UK economy will contract by 0.6% this year. Headwinds facing the economy include high energy prices and labour shortages. The IMF also points to rising interest rates as dragging on UK growth.

The Bank of England (BoE) will conclude its latest policy meeting on Thursday and is widely expected to raise interest rates by an additional 50bps.

Mindful of the impact on domestic growth, there are signs that the BoE could pause its hiking cycle following Thursday’s increase. if this is confirmed by the BoE, the Pound is likely to plunge.

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