- GBP/USD bulls have stepped in as the US dollar is faded ahead of the Fed.
- The Fed is widely expected to announce a hawkish hike.
At 1.2495, GBP/USD is flat in Asia in what could the quiet before the storm should there be any surprises in the Federal Reserve interest rate decision.
The US dollar retreated against a basket of currencies on Tuesday, wilting below the dollar index hit a 20-year high last week on expectations the Fed will be more aggressive than peers as it contends with inflation running at its fastest pace in 40 years. Markets traded positively, despite what is expected to be a 50bps rise accompanied by more hawkish guidance as well as the announcement of quantitative tightening.
''The market is expecting that the ceiling for the fed funds rate will be over 200bps by September. Of course, the Fed could always raise by more than expected, reversing more quickly the pandemic interest rate cuts,'' analysts at ANZ Bank explained.
''But given the weight that the FOMC puts on forward guidance and a preference for orderly market moves, particularly given current geopolitics and the slowdown in China, such a surprise seems unlikely. So it is understandable how markets may be sensing a relief rally.''
Eyes on BoE
Meanwhile, the focus is also on the Bank of England. We had a ‘dovish hike’ in March yet a further 25bp rate hike is expected at its meeting on Thursday 5 May.
''We see rates rising twice more this year and once in early 2023 for a terminal rate of 1.75%,'' analysts at Nomura said.
''This is lower than markets expect, and while we acknowledge the upside risks to our Bank Rate forecast we think the economic cycle will ultimately prevent the Bank from raising rates further than that.''
''Higher near-term inflation view is almost inevitable, but the key question is whether the Bank continues to see inflation sub-target at the end of the horizon – driven down in the Bank’s February forecasts by spare capacity as high spot inflation destroys demand. A lower GDP and higher unemployment profile look likely too.''
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