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Pound US Dollar Exchange Rate to Surge on Fed Rate Decision?

Stacks of US Dollar (USD) banknotes.

GBP/USD Exchange Rate Strengthens as Markets Brace for Final Fed Rate Hike

The Pound US Dollar (GBP/USD) exchange rate is firming as investors anticipate the 10th and potentially final interest rate hike from the Federal Reserve.

At time of writing the GBP/USD exchange rate is around $1.2519, a 0.34% climb from this morning.

US Dollar (USD) Subdued ahead of Interest Rate Decision

The US Dollar (USD) is struggling for demand this morning as the US banking sector is stoking caution and could weigh heavily on the Fed’s interest rate decision later today.

Market expectations of a 10th consecutive interest rate rise from the Fed could be limiting losses for the ‘Greenback’. But despite a predicted third 25bps rate hike in a row, expectations are growing that a pause is on the way, denting the US Dollar. With Q1 GDP data showing the US economy is slowing modestly, further weighing on the US Dollar is the JP Morgan rescue of First Republic Bank, highlighting turmoil in the banking sector.

Looking ahead, and eyes will be on not just the interest rate decision, but forward guidance from Fed policymakers. Neil Shearing, Chief Economist at Capital Economics, predicts that this will be the last rate hike:

‘Then it’s done. And that’s because there are already significant signs the economy is slowing. The labour market is cooling and given all the problems in the US banking system and tightening lending conditions, there won’t be any call for higher rates.

However, one last economic data release could sway the decision one last time. The latest ISM services PMI, if it prints to forecast, could provide a slither of optimism over the US economy. Expectations of the service sector edging higher to 51.8 could highlight a modest recovery after plummeting last month.

Pound (GBP) Boosted by Market Optimism

Meanwhile, the Pound is finding moderate strength against almost all its rivals despite a lack of economic data. A cautious optimism has swept over GBP investors, and the wider market, as expectations of a final rate hike from the Fed could at last allow global growth to recover.

However, capping any further gains for Sterling is growing uncertainty surrounding the Bank of England’s (BoE) own monetary policy. With a flurry of mixed inflation data, compounded by poor economic performance, uncertainty mounts over the interest rate decision from the central bank at the next meeting.

Looking ahead, and the Pound could climb further if the Fed hints at a pause at the next policy meeting as global markets would breathe a sigh of relief from the relentless borrowing cost surges. Domestically, the final services PMI figure could bolster Sterling if it is confirmed at the highest level in a year.

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