Pound to Dollar FX Outlook: GBP/USD Exchange Rate Fluctuates ahead of Fed Decision

September 18, 2024 - Written by John Cameron

STORY LINK Pound to Dollar FX Outlook: GBP/USD Exchange Rate Fluctuates ahead of Fed Decision

The Pound US Dollar (GBP/USD) exchange rate was largely rangebound on Tuesday as investors shrugged off an upbeat US retail release in anticipation of the Federal Reserve’s looming interest rate decision.

At the time of writing GBP/USD was trading at around $1.3204, virtually unchanged from Tuesday’s opening rate.

US Dollar (USD) Sinks as Markets Await Fed Rate Decision

The US dollar (USD) traded sideways on Tuesday, finding modest support from robust American retail sales data for August, which outpaced expectations and marked the fifth consecutive year of positive surprises for the month.

Retail sales edged up 0.1%, defying forecasts of a 0.2% decline, although the pace of growth slowed from July's upwardly revised 1.1%.

Michael Brown, market analyst at Pepperstone, commented:

‘The headline beat represents the 5th straight August in which retail sales has surprised to the upside. Meanwhile, the control group metric, which broadly represents the basket used in the GDP release, rose by 0.3% MoM for the second straight month.’

However, mounting expectations of an aggressive policy-easing cycle from the Federal Reserve kept the dollar's upside in check ahead of the upcoming monetary policy meeting. Market participants widely anticipate the central bank to kick off a rate cut cycle this week, with analysts divided over the size of the reduction. The key question remains: will the Fed opt for a modest 25 basis-point cut or a more substantial 50 basis-point move?

As the Fed's decision approaches, traders may be reluctant to take aggressive positions on the ‘greenback’, preferring to wait for clearer policy signals.

Pound (GBP) Wavers amid Absence of Data

The Pound (GBP) found little traction on Tuesday, with a dearth of UK data releases leaving investors on the sidelines.

As market participants look ahead to UK inflation figures and the Bank of England's (BoE) upcoming interest rate decision, a cautious approach is likely to prevail, muting aggressive bets on Sterling.

However, whispers in the market suggest the BoE could adopt a less dovish stance than its major central bank peers in the final quarter, lending support to the pound amid Tuesday's lack of market-moving releases.

Michael Field, European Market Strategist at Morningstar, weighed in:

The chances of a further rate cut in September are slim, according to a recent poll of economists by Reuters, with almost all surveyed believing September is coming too soon after the recent rate cut. Markets seem to be pricing in one more rate cut, which is likely to come later in the year.

Elsewhere, a cautiously optimistic market mood helped to buoy the increasingly risk-sensitive Pound.

Pound US Dollar Exchange Rate Forecast: Fed Rate Cut to Sink USD?

Wednesday's key driver for the US dollar is expected to be the Federal Reserve's impending monetary policy announcement. A dovish start to the Fed's policy monetary easing cycle could see USD languish near recent lows.

Across the Atlantic, the latest UK inflation figures are set to hit the wires. Evidence of persistent price pressures may bolster GBP as traders scale back bets on aggressive Bank of England (BoE) rate cuts.

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TAGS: Pound Dollar Forecasts