GBP/USD consolidates under 1.3100 with Fed primed for first rate hike in three years

• GBP/USD continues to consolidate just under 1.3100 pre-Fed policy announcement, boosted amid the market’s risk-on vibe.
• The Fed is expected to hike rates by 25bps, with focus on the new forecasts, dot-plot and Powell’s tone.

GBP/USD continues to consolidate just to the south of the 1.3100 level with the Fed policy announcement due at the top of the hour. At present, the pair is trading with gains of about 0.4%, with sterling performing well with markets in a risk-on mode amid hopes for further progress in Russo-Ukrainian peace talks. Headlines regarding this topic have been mixed in recent hours, but FX markets haven’t paid too much head and are instead in their typically pre-Fed policy announcement holding pattern.

The bank is expected to lift rates by 25bps for the first time in three years. Traders/market participants will be predominantly focused on 1) the Fed’s new economic forecasts, 2) the Fed’s new dot-plot and 3) the tone of the statement and Fed Chair Jerome Powell’s press conference remarks. Any dovish surprises may be enough to see GBP/USD break back above 1.3100, opening the door to a push on towards 1.3200.

But most do not expect a dovish outcome, with the Fed policymakers having seemingly expressed more worry in recent weeks about the worsening inflation outlook given recent geopolitical events. Recent moves in long-term US bond yields suggest markets increasingly believe that, in the long-run, the Fed will lift rates back to the so-called “neutral” level (in the 2.0-2.5% region). Any hawkish signals from Wednesday’s meeting that spur further upside in long-term US yields would risk sending GBP/USD back towards weekly lows in the 1.3000 area, especially given that the BoE, who set rates on Thursday, won’t be expected to match any Fed hawkishness.