GBP/USD drops toward 1.1330 after hitting a fresh multi-year low amidst a buoyant US dollar

• The GBP/USD fell to a fresh 37-year high at around 1.1300.
• Most economists prepare for another hefty Fed hike alongside the update of the US economy projections.
• The Bank of England will meet on Thursday, and analysts estimate a 50 bps rate hike.

The GBP/USD refreshes 37-year lows during the North American session, tumbling 0.38%, ahead of the FOMC’s decision, as geopolitical tensions in Eastern Europe arise. A risk-off impulse in the FX complex keeps the greenback in the driver’s seat, reaching a two-decade high above the 111.00 mark, while most G8 currencies are dropping.

Earlier, the GBP/USD hit the daily high at 1.1384, but Russian President Vladimir Putin’s commentary spurred a flight to safety, sending the major sliding towards a fresh YTD low at 1.1304. At the time of writing, the GBP/USD is trading at 1.1333.

GBP/USD drops on buoyant US dollar ahead of the Fed and BoE’s decision

Sentiment remains upbeat ahead of the FOMC’s decision, with European and US equities rising. US Treasury bond yields remain depressed, except for the US 2-year yield, which crossed the 4% threshold during the day. Today, the US Federal Reserve is expected to raise the Fed funds rate (FFR) by 75 bps, to the 3-3.25% area, into restrictive territory, according to the last Summary of Economic Projections (SEP) revealed in June. Nevertheless, don’t discount a 100 bps move, with odds of lifting rates of that size at an 18% chance.

Alongside revealing the monetary policy statement, the Fed would update the SEP, which could give us some clues regarding Fed officials’ projections of US growth, unemployment, inflation, and interest rate levels. Regarding interest rates, most investors are waiting for the “dot-plot,” where all the policymakers delieate the future path for the Federal funds rate (FFR). A large part of Wall Street estimates a hawkish tilt towards finishing 2022 at around the 3.75-4% range and, by 2023, to move towards the 4-4.50% area.

The US Dollar Index, a measure of the greenback vs. six peers, is trading at two-decade-highs at around 111.000, up by 0.74%, breaching for the first time the 111.000 mark. Contrarily, US T-bond yields are getting a respite, with the US 10-year bond yield almost flat at 3.571%.

Elsewhere. the US economic docket revealed that Existing Home Sales for August dropped 0.4%, less than expectations for a 2.29% contraction estimated and also better than July’s 5.9% fall.

On Thursday, the Bank of England (BoE) will meet, and the consensus estimates the central Bank will hike 50 bps the Bank’s rate. At the same meeting, the BoE is expected to begin its Quantitative Tightening (QT), with outright sales from its GBP 838 billion gilt on its balance sheet at a pace of GBP 10 billion a quarter.

Also read: BoE Preview: Forecasts from 10 major banks, a close call between 50 bps and 75 bps

What to watch

The US economic docket will feature the US Federal Reserve monetary policy decision at 18:00 GMT, followed by Chair Jerome Powell’s press conference at 18:30 GMT.

GBP/USD Key Technical Levels