Pound US Dollar Exchange Rate News: GBP/USD Climbed as Markets Brace for Fed Interest Rate Decision

May 3, 2023 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Climbed as Markets Brace for Fed Interest Rate Decision

US Dollar (USD) Undermined by Expectations of Final Rate Hike

The US Dollar (USD) struggled for demand, despite expectations of a 25bps interest rate hike at the Federal Reserve policy meeting late on Wednesday. But with many believing it to be the final rate hike before a pause, the ‘Greenback’ lost demand. Jim Grant, founder and editor of Grant’s Interest Rate Observer, commented on the Fed’s nine consecutive hikes, and how a 10th is all but priced in:

‘That still has not raised the fed-funds rate to the nominal rate of inflation, nor until recently has it seemed to introduce notable levels of stress in the financial system.’

A 10th consecutive rate hike could also be the last, according to many economists, with a pause in the cash rate expected after Wednesday’s meeting. With a slew of downbeat data as of late, as well as the continued turmoil in the regional banking sector, the ‘Greenback’ struggled for demand.

Further weighing on the US Dollar is the continued turbulence in the banking sector. With JP Morgan taking over First Republic bank, fears of further contagion in regional US banks could sap demand further.

Pound (GBP) Boosted by Cautious Optimism

Meanwhile, the Pound (GBP) found moderate strength against many of its peers on Wednesday despite a lack of economic data.

With the markets breathing a collective sigh of relief at the prospect of the Fed finally halting their aggressive tightening cycle, Sterling enjoyed a relatively upbeat market.

However, preventing any further gains for the Pound was the lingering uncertainty surrounding the Bank of England’s (BoE) own monetary policy going forward. With a myriad of mixed economic figures, as well as mixed inflation data, investors are increasingly anxious as to how the central bank intends to continue its rate setting path.

GBP/USD Exchange Rate Forecast: Dovish Fed Rate Hike to Sink the Greenback?

Looking ahead, the Pound US Dollar exchange rate could see the Pound strengthen in the wake of the Fed interest rate decision. With growing expectation that the 25bps could well be the last in the current hiking cycle, any hints that a pause is coming, the US Dollar could nosedive.

Neil Shearing, Chief Economist at Capital Economics, commented on the situation:

‘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.’

Meanwhile, the Pound will have to rely on market sentiment amid a lack of economic data. Sterling could see further daylight between itself and the ‘Greenback’ if market sentiment improves on the prospect of the Fed finally holding their interest rates.

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