The USD has strengthened overnight following last night’s Federal Reserve interest rate meeting which is the first under new Fed Chair Kevin Warsh.
As expected, the US central bank voted to keep interest rates on hold at 3.50%-3.75%. However, there was a notable hawkish shift in their overall tone which caught markets off guard. They removed previous language pointing to a bias in cutting rates and instead the future projections pointed towards a likely rate hike before the end of the year. The change was driven largely by a sharp upward revision to inflation forecasts, with officials now expecting headline inflation of 3.6% in 2026, up from 2.7% previously.
Consequently, money markets are now pricing the odds of a September US rate hike at over 50% (vs 30% on Tues) and the odds have shot up to over 80% for a hike by the end of December. This repricing in US interest rate expectations has boosted demand for the USD leading to a rally in the currency.
In other news, oil prices have eased after the US and Iran signed a deal to end the war. Markets will be closely examining when the Strait of Hormuz will be fully reopened for free passage. Once this is confirmed, then this might lead to a bit of increased flow away from safe-haven currencies and into more perceived riskier assets.
As a result, GBP/USD has fallen around 1.2% from yesterday’s high and now trades at a 10-week low. The EUR/USD is down around 1.1% from yesterday’s high and at the lowest levels since the end of March. The GBP/EUR remains in familiar ranges but has lost around half a cent which takes it to the lower end of where it has traded this month.
Attention now turns to the Bank of England, which announces its own rate decision later today. While they’re also expected to keep rates on hold (3.75%), traders will be closely monitoring their voting patterns and thoughts on the ongoing impact of the Iran war and how this new truce will impact on inflation moving forward. If the BoE tone remains fairly steady in its tone, then the contrast between a hawkish Fed and a steady BoE could keep pressure on sterling into the afternoon. Watch this space.
