GBP/USD Rate Rebound Vulnerable to Hawkish Fed Forward Guidance

British Pound Talking Points

GBP/USD continues to retrace the decline from earlier this month despite the limited reaction to the UK Consumer Price Index (CPI), but the Federal Reserve interest rate decision may undermine the recent rebound in the exchange rate if the central bank steps up its effort to combat inflation.

Fundamental Forecast for British Pound: Neutral

GBP/USD halts a three-week decline as it extends the rebound from the yearly low (1.1760), and the exchange rate may stage a larger recovery over the coming days as it initiates a series of higher highs and lows.

However, the Federal Open Market Committee (FOMC) rate decision may influence the near-term outlook for GBP/USD as the central bank is expected to deliver another 75bp rate hike, and Chairman Jerome Powell and Co. may prepare US households and businesses for a restrictive policy as the central bank struggles to curb inflation.

In turn, the recent rebound in GBP/USD may turn out to be a correction in the broader trend as the FOMC appears to be on track to implement higher interest rates throughout the remainder of the year, but a shift in the forward guidance for monetary policy may lead to a larger recovery in the exchange rate if the committee looks to take a break from its hiking cycle.

With that said, GBP/USD may continue to retrace the decline from earlier this month should the FOMC lay out plans to keep the Fed Funds rate around neutral, but the exchange rate may struggle to retain the advance from the yearly low (1.1760) if the central bank stays on track to implement additional rate hikes in 2022.

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong