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Federal Reserve Decision in Focus for Pound to US Dollar Exchange Rate Outlook

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Pound to US Dollar Exchange Rate Climbs as Fed Jitters Weigh on ‘Greenback’ 

Despite a lack of strong demand for the Pound (GBP) this week, the Pound Sterling to US Dollar (GBP/USD) exchange rate is still climbing. Anticipation for an upcoming Federal Reserve policy decision is keeping pressure on the US Dollar (USD). 

Recent GBP/USD gains have been largely due to US Dollar weakness and the market’s risk-on movement. Last week saw the pair gain an impressive three cents as a result. 

While GBP/USD has struggled to advance too much from the week’s opening level of 1.2668, it continues to trend with an upside bias. At the time of writing, GBP/USD is trending near this morning’s best level since March – 1.2779. 

Coronavirus and Brexit uncertainty is likely to limit Sterling (GBP) strength for a while. However, upcoming Fed news could also have an impact on the Pound to US Dollar exchange rate outlook. 

Pound (GBP) Exchange Rate Advances Limited by Coronavirus and Brexit Uncertainties 

The Pound has been benefitting from the US Dollar’s weakness lately as well. Sterling has been increasingly risk-correlated amid the coronavirus pandemic, so advanced during a period of rising market confidence in an economic rebound. 

Hopes that major economies will rebound from the pandemic continue to keep the Pound gaining against the US Dollar. However, its gains are becoming more and more limited. 

Markets are becoming increasingly concerned about the potential combined effects of coronavirus and Brexit on Britain’s economy. Mixed reaction to the government’s exit strategy from quarantine, as well as a lack of developments in Brexit negotiations, are worsening market uncertainty. 

According to Ruth Gregory, UK Economist at Capital Economics: 

‘March’s GDP figures showed the UK economy was already in freefall within two weeks of the lockdown going into effect. And with the restrictions in place until mid-May and then only lifted very slightly, April will be far worse.’ 

US Dollar (USD) Exchange Rate Remains Unappealing Ahead of Federal Reserve 

Due to risk-sentiment and major protests across the US, the US Dollar (USD) has been unappealing lately. 

Its appeal as a safe haven currency has also been fairly limited in times of risk-off movement. This is because the US Dollar yield is lower due to loose US monetary policy. 

This is part of why investors are even more hesitant to buy the US Dollar ahead of this evening’s Federal Reserve policy decision. 

Some believe the Fed will remain cautious until there is more clarity over how the coronavirus pandemic will unfold. According to Masafumi Yamamoto, Chief Currency Strategist at Mizuho: 

‘The Fed can afford to wait and see on yield curve control because the US economy has gotten past the crisis phase and only just entered the healing phase,’ 

Federal Reserve News Could Impact Pound to US Dollar (GBP/USD) Exchange Rate Outlook 

The Pound to US Dollar (GBP/USD) exchange rate outlook is still higher for the time being. Rising risk-sentiment may keep the US Dollar from recovering much soon. 

However, this evening’s upcoming Federal Reserve news has the potential to cause shifts in the outlook if it surprises investors. 

For example, if the Fed ramps up stimulus plans to help the US economy to weather the coronavirus pandemic and protests. In this situation, risk-sentiment might rise further and USD would see further pressure. 

On the other hand, a more hawkish shift in tone from the bank could spark a stronger US Dollar rebound. 

The Pound to US Dollar (GBP/USD) exchange rate outlook will also be influenced by any fresh Brexit developments.