**GBP/USD Bounces on Post-Fed Dollar Weakness**
*By Pablo Piovano, for FXStreet*
The GBP/USD currency pair saw a strong bounce during the New York session after the Federal Reserve’s recent policy update, reflecting significant market reactions to the central bank’s outlook and the corresponding shift in US Dollar sentiment. As markets digested Chairman Jerome Powell’s remarks and the released FOMC statement, foreign exchange traders saw increased volatility with Sterling finding new momentum against the Greenback. This article explores the details of the GBP/USD rally, the major catalysts behind the move, a technical analysis of price action, and potential future scenarios for the pair.
**Federal Reserve Policy Update: Key Takeaways**
The Federal Reserve concluded its latest two-day policy meeting with no change to the Federal Funds Rate, holding it at the current range of 5.25% to 5.50%, a level that has remained since July of the previous year. Market participants were closely watching for any clues as to when the first interest rate cut would occur.
Key points from the Fed’s most recent communication:
– The statement acknowledged that progress on inflation “has slowed” over the first half of the year, adjusting its prior more optimistic language.
– The FOMC made no explicit guidance on the timing of potential policy easing, instead emphasizing a data-dependent approach.
– Chair Jerome Powell, in his press conference, stated that the committee needs to gain “greater confidence” that inflation is returning towards the 2% objective before cutting rates.
– Powell also made clear that a rate hike is “unlikely,” but did not rule it out should inflation show signs of reaccelerating.
Bond and money markets were quick to react, with US Treasury yields pulling back and market-based rates pricing reflecting a greater chance of a rate reduction at the September meeting. These reactions translated into softening support for the US Dollar.
**US Dollar Weakness: Broad Market Consequences**
The US Dollar Index (DXY), which measures the value of the Dollar against a basket of major world currencies, retreated from intraday highs after the Fed’s statement and Powell’s comments. This change in momentum followed weeks during which the Greenback had been supported by resilient US data and shifting Fed rate cut expectations.
Highlights of Dollar-index moves post-Fed:
– The Dollar fell across the board in the aftermath of the Fed meeting.
– The move signified a shift in sentiment as the US central bank adopted a more cautious tone on inflation progress.
– Lower US yields and increased risk sentiment fueled demand for higher-yielding and risk-correlated currencies like the Pound.
– Commodities and equities also responded positively, reflecting improved liquidity expectations if the Fed enters an easing cycle.
**GBP/USD Rally: Sterling Takes Advantage**
The British Pound capitalized on the opportunity, with GBP/USD rebounding sharply from earlier lows as Dollar selling intensified. The currency pair, which had begun the session on the defensive amid broad-based Greenback strength, quickly reversed its direction and tested key technical resistance levels.
Intraday GBP/USD performance and catalysts:
– GBP/USD bottomed out near the 1.2800 region earlier in the session before bouncing over 100 pips following the Fed news.
– The rally was fueled by a combination of US Dollar softness, short covering, and renewed appetite for risk.
– The move erased losses from earlier in the week and targeted the 1.2900 area, a psychologically significant hurdle for further upside.
**UK Economic Context: Factors Supporting Sterling**
While the primary driver of the GBP/USD move was US Dollar weakness, certain underlying factors provided a supportive base for Sterling:
– UK inflation continues to outpace that of the US, raising doubts about imminent rate cuts from the Bank of England (BoE).
– Recent UK economic data showed resilience, with wage growth and employment figures exceeding consensus expectations.
– Market participants remain divided on the BoE’s next steps, but rate differentials have turned modestly in favor of holding,
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