Pound US Dollar (GBP/USD) Exchange Rate Firms ahead of Fed Rate Decision
The Pound US Dollar (GBP/USD) exchange rate is gaining ground ahead of the Federal Reserve’s interest rate decision this evening.
At the time of writing the GBP/USD exchange rate is trading at around $1.2389, which is up roughly 0.2% from this morning’s opening rate.
US Dollar (USD) to Weaken Following Dovish Fed?
The US Dollar (USD) is on the back foot this morning as USD investors trade cautiously ahead of the conclusion of the Federal Reserve’s latest policy meeting later this evening.
The interest rate hike has been priced in at 50bps. Leaving subsequent movement in the US Dollar to be primarily driven by the Fed’s forward guidance.
USD investors will be keen to learn the Fed’s policy plans for 2023. If Fed Chair Jerome Powell confirms this month’s decisions it marks the start of the US central bank’s pivot toward more moderate interest rate hikes, then the US Dollar is likely to weaken.
A more modest pace of monetary tightening from the Fed is also likely to bolster market risk appetite. Further compounding the ‘Greenback’s losses.
On the other hand, Powell might suggest interest rates will peak at a higher level than previously forecast. Potentially offering some support to USD exchange rates.
Pound (GBP) to be Supported by BoE Comments?
The Pound (GBP) is mixed today following a drop in inflation. Headline inflation fell from 11.1% to 10.7% in November, but cost-of-living concerns are limiting GBP upside potential.
Sterling’s gains also remain capped ahead of the Bank of England’s (BoE) interest rate decision on Thursday. Investors have priced in a 50bps hike, following an aggressive 75bps hike in November.
Any deviation could influence the Pound, although this is unlikely. It’s more likely GBP investors will trade on comments regarding future policy plans. Whilst the BoE will likely continue with their dovish streak, reassurance of continued hikes could support Sterling on Thursday.
Turning to Friday, the UK’s November retail sales are due. A second month of sales growth could help to lift GBP.
In the meantime, GBP will likely continue to trade on domestic headwinds. Continued coverage of the cost-of-living crisis could keep the Pound capped.