Pound US Dollar (GBP/USD) Exchange Rate Wavers ahead of Fed
(Updated 15:50, 26/1/22) The Pound US Dollar (GBP/USD) exchange rate has continued to waver in a narrow range this afternoon as markets remain quiet ahead of the Federal Reserve decision. GBP/USD is currently trading at $1.35, virtually unchanged from the start of today’s European session.
The lack of a clear direction comes as markets brace for the Fed’s interest rate decision tonight. Economists expect the US central bank to signal plans to begin hiking rates in March. However, the potential speed of its hiking cycle and its approach to quantitative tightening are unknown. Therefore, investors are understandably cautious.
Meanwhile, the Pound (GBP) remains beset by the ongoing ‘partygate’ scandal. Political uncertainty is weighing on Sterling. That said, movement seems somewhat limited as the country awaits Sue Gray’s inquiry findings.
A slight improvement in market mood – as seen in rising equity markets – has prevented GBP’s downside thus far, as it favours the riskier Pound over the safe-haven US Dollar (USD).
Attention now turns fully to the Fed. Could GBP/USD tumble?
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Pound US Dollar (GBP/USD) Exchange Rate Steady as Investors Hold Back
The Pound US Dollar (GBP/USD) exchange rate has wavered in a narrow range so far this morning as markets await the Federal Reserve’s policy decision this evening.
An absence of data on both sides adds to the lack of direction. Meanwhile, Sue Gray’s impending report also hangs over Sterling.
Pound (GBP) Subdued as Investors Await Sue Gray’s Report
The Pound (GBP) is fairly quiet against the US Dollar (USD) today in what could be the calm before the storm.
People across the UK are waiting for the findings of Sue Gray’s inquiry into the ‘partygate’ scandal that has engulfed the government in recent weeks.
Yesterday’s trade was choppy as the police announced that they were launching a separate criminal investigation. As a result, there was confusion over whether Gray’s report could be published, when it would be released and which parts of it may be withheld.
It is now confirmed that the report can and will be published in full, if not today then probably tomorrow. The findings could be politically explosive. Boris Johnson could realistically face a confidence vote by the end of the week.
Therefore, GBP investors seem to be waiting with bated breath. There are also no UK data releases today for them to focus on, so movement in Sterling seems limited.
US Dollar (USD) Muted ahead of the Fed Decision
The US Dollar, meanwhile, is also quiet ahead of the Fed’s policy announcement.
Economists expect the US central bank to signal that it will begin hiking rates in March. But the way in which the Fed communicates this, and how it plans to approach quantitative tightening (QT), will likely have a big impact on the ‘Greenback’.
Markets have grown anxious in recent months as investors brace for less favourable financial conditions. This has often been good for the safe-haven US Dollar but is not desirable overall. Fed Chair Jerome Powell faces a communication challenge today as he needs to outline the Fed’s tightening plans without spooking markets.
Ipek Ozkardeskaya, Senior Analyst at Swissquote, argues that the Fed should seek to comfort markets:
‘The hawkish fears include that the Fed could announce the end of the QE taper as soon as today, that it could hint at back-to-back rate hikes instead of one rate hike every quarter, that it could surprise with a 50bp point hike in March instead of a more likely 25bp raise, or it could even choose not to wait until March and hike the rates this week.
‘Yet, these hawkish expectations are certainly a bit far stretched; the Fed can’t trigger a financial crisis to fix the inflation problem. There is a greater chance we meet a confident, yet a comforting Fed at today’s announcement. If the Fed wants to carry on with its hawkish plans, it needs to get the risk appetite under control.’
However, other economists disagree. Mohamed El-Erian, Chief Economic Advisor to Alliance, believes the Fed should announce an early end to quantitative easing (QE).
With the decision looming, USD investors are refraining from any aggressive trading this morning.
GBP/USD Exchange Rate Forecast: Big Movements Ahead
As the day unfolds, we may see activity in the US Dollar pick up. At previous announcements, investors have taken a ‘buy the rumour, sell the news’ approach, with USD strengthening in the run-up to the Fed’s decision only to fall after it.
Today could be different, as there is a higher degree of uncertainty around the Fed’s forward guidance.
If the Fed takes a more hawkish stance – ending QE early, signalling a faster hiking cycle than anticipated – then market sentiment could sour and the ‘Greenback’ could climb. If the Fed tries to soothe markets (possible amid the geopolitical tensions with Russia and concerns over economic growth) then USD may drop.
As for the Pound, if Sue Gray’s report is as damning as some sources have suggested, political turmoil could dent GBP.