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Pound US Dollar Exchange Rate to Tumble on Hawkish Fed?

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Pound US Dollar Exchange Rate Rangebound as Markets Brace for Fed Policy Statement

The Pound US Dollar (GBP/USD) exchange rate is mostly rangebound so far this morning as USD investors are reluctant to make any aggressive bets ahead of the Federal Reserve’s latest interest rate decision.

At the time of writing the GBP/USD exchange rate is trading at around $1.3509, virtually unchanged from this morning’s opening rate.

US Dollar (USD) Poised to Soar on Hawkish Fed Outlook

Speculation the Federal Reserve will accelerate its current tightening cycle has allowed the US Dollar (USD) draw some notable support over the past couple of weeks.

Now all eyes are on the Fed as the US central bank is set to deliver its first interest rate decision of 2022 later this evening.

No policy changes are expected from the Fed this month, leaving the focus to be on the bank’s forward guidance.

Given US inflation is currently sitting at a 40-year high of 7% and with unemployment falling back below 4%, there is a strong case for the Fed to adopt a more aggressive approach to monetary policy this year.

USD investors expect the Fed to signal its next interest rate hike will come in March, whilst also hinting at more hikes to come later in the year.

This could see the US Dollar surge later this evening as the prospect of multiple hikes will not only be welcomed by USD investors but it could also spook equity markets, with any resulting selloff likely to further bolster demand for the safe-haven currency.

Pound (GBP) Faces Turbulent Couple of Days amid UK Political Uncertainty

At the same time, the Pound (GBP) could face some major volatility through the second half of the week as Boris Johnson’s premiership could be upended by the publication of an inquiry into alleged breaches of lockdown restrictions by Downing Street.

The internal inquiry, led by senior civil servant Sue Gray, could be hugely damaging for the Prime Minister if it indicates Johnson may have been complicit in any of the several gatherings which are thought to have taking place in Downing Street during periods when Covid restrictions were in place.

GBP investors fear any revelations from the report could lead to a vote of no confidence in the PM, with the resulting political uncertainty likely to rock the Pound US Dollar exchange rate.

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