- GBP/USD remains confined in a narrow trading band as traders keenly await the FOMC decision.
- Bets for smaller Fed rate hikes continue to weigh on the USD and lend some support to the pair.
- A softer risk tone limits losses for the safe-haven Greenback and acts as a headwind for the major.
The GBP/USD pair struggles to gain any meaningful traction on Wednesday and oscillates in a narrow band through the first half of the European session. The pair is currently placed above the 1.2300 mark, nearly unchanged for the day, as traders now seem to have moved to the sidelines ahead of the highly-anticipated FOMC policy decision.
Heading into the key central bank event risk, bets for a smaller Fed rate hike keep the US Dollar bulls on the defensive and lend some support to the GBP/USD pair. In fact, the markets seem convinced that the US central bank will slow the pace of its policy-tightening cycle amid signs of easing inflationary pressures. The expectations were reaffirmed by Tuesday’s release of the US wage growth data, showing that labor costs increased less than expected in the fourth quarter.
The recent US macro data, however, pointed to a resilient economy and suggested that the Fed is still going to sound more hawkish. Furthermore, several FOMC members have stressed the need to keep interest rates higher for longer in order to bring down inflation. Apart from this, the prevalent cautious market mood – amid the pre-Fed anxiety – helps limit the downside for the safe-haven greenback and acts as a headwind for the GBP/USD pair, at least for the time being.
Traders now look forward to the US economic docket, featuring the release of the ADP report on private-sector employment, ISM Manufacturing PMI and JOLTS Job Openings data. The focus, however, will remain glued to the FOMC monetary policy statement. This, along with Fed Chair Jerome Powell’s comments at the post-meeting press conference, will be scrutinized for clues about future rate hikes. The outlook will play a key role in influencing the near-term USD price dynamics.
The market attention will then shift to the Bank of England (BoE) policy meeting on Thursday amid bets that elevated consumer inflation will force the central bank to continue lifting rates. Nevertheless, the decision will further contribute to determining the next leg of a directional move for the GBP/USD pair.
Technical levels to watch
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The Pound to US Dollar exchange rate has held firmly above the 1.2300 mark today, ahead of tomorrow’s Federal Open Market Committee meeting and a raft of US economic data points.
GBP/USD has been trading close to the 1.2300 mark for the majority of the session, after reaching its best levels since March last week. This was due to a general sense of optimism among traders over the possibility of a vaccine-driven global recovery, after strong gains in the stock markets.
However, the Sterling could see greater volatility this week, as the US releases a raft of economic data, which will influence the Fed’s stance at tomorrow’s meeting.
The Labor Department is due to report on Initial Jobless Claims today, which will be closely watched after last week saw the number of initial claims edge higher. Any further gains could raise concerns over the strength of the labor market recovery and could lead to an increase in demand for the US Dollar as a safe-haven asset.
In addition, traders will also be looking towards the Fed’s rate decision, with expectations that the US central bank will keep rates on hold at 0.25%. However, investors will be looking for clues of any changes to their outlook for monetary policy.
In the near-term at least, the GBP/USD exchange rate could be rangebound as traders await further details of the FOMC meeting. The focus is likely to remain firmly on the US Dollar, with the currency potentially setting the tone for the rest of the week.
