Sterling hangs in the balance ahead of Fed and BoE decisions

GBP USD Exchange Rate Rises Sharply Following Fed Rate Hike 

Sterling exchange rates hang in the balance ahead of today’s Federal Reserve FOMC meeting and tomorrow’s Bank of England Monetary policy meeting.

The pound has been one of the strongest performing currencies of 2024, mostly helped by the prospect of higher for longer interest rates in the UK vs the Eurozone and the US.

UK interest rates currently sit at 5.25% and there is an expectation for rates to be cut by 100 basis points by year end. Eurozone rates are expected to be cut from 4.5% to 3.2% with US rates expected to shift from 5.5% to 4%. This would leave UK rates almost 1% higher than the Eurozone and slightly higher than the US at 4.25%.

Interest rate expectations have driven the value of GBPEUR to a 4-month high and last week the rate was 0.4% off the 17-month high. However, a change in narrative by the BoE tomorrow could lead to sterling weakness. A prospect of earlier rate cuts could supply the most pain for sterling.

Federal Reserve Meeting

This evening’s FOMC meeting is expected to provide clarity over the future of interest rates in the US. The dollar has held its ground against sterling over the past couple of weeks and has strengthened against the euro since the turn of the year. USDEUR currently sit’s close to 6-week highs.

Markets are pricing in a 50% chance of an interest rate cut in March. A cut in interest rates would likely weaken the greenbacks footing and strengthen cable (GBPUSD) exchange rates.

No change in interest rates is expected this month, however, many will be looking to decipher the messaging from the Fed and whether that supports the prospect of cuts coming soon. Recent economic data from the US has been positive which provides the Fed plenty of scope in their decision.

The dollar accounts for 60% of globally exchanged currency and is the peg for many pairs meaning this evening’s announcement is likely to cause significant volatility.

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