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Markets await US Fed rate decision

Wednesday 26 January, 2022

Daily Currency Update

After starting the week on the back foot the pound has regained some of the losses seen on Monday and Tuesday with it trading higher this morning versus both the US dollar and the euro. Helping the pound’s move higher is some calm being restored to stock markets as some of the tensions regarding the Russian build-up of troops on the Ukrainian border seem to have abated for now. Domestically Boris Johnson is expected to take another barrage from across the aisle at Prime Minister Questions at lunchtime, with the latest revelation being that a birthday party was held for the PM when the country was under lockdown restrictions. Later in the day we may finally see the publication of the much anticipated report by senior civil servant Sue Gray into Downing Street's parties during the pandemic. Its exact release time is not known, and it may drag on to later in the week given that the Metropolitan Police are looking into the numerous, potentially illegal, get-togethers held by ministers and aides over the past couple of years. Should Johnson be forced from office it will be interesting to see the impact on the pound, will the uncertainty see it slip or will the removal of what many perceive to be a loose cannon be beneficial? GBP/EUR is back up to 1.1955 with GBP/USD at 1.35 ahead of a key day in the US.

Key Movers

Today sees the latest monetary policy decision from the US Federal Open Market Committee with no raise in interest rates forecast, but a huge amount of attention being drawn to the future path of policy expected to be outlined by Fed Chairman, Jay Powell. With inflation in the States at a 40 year high action is needed to bring price rises under control asap, so markets are expecting to see Powell confirm an end to its current quantitative easing programme in the next couple of months and possibly signal that a rate hike could occur at the March 16th meeting. Expectations are that a 25bp hike will likely occur then, however Powell could deem more aggressive action is necessary and stop its bond buying programme with immediate effect and indicate that a 50bp hike is needed in March. There are also various scenarios being circulated about it starting to sell back the bonds it bought during the pandemic before the end of the year. So with so many moving parts it’s hard to know exactly what the Fed will decide to do, so a volatile evening in the FX markets is likely. EUR/USD trades at around 1.1285.

Expected Ranges

  • GBP/USD: 1.3400 - 1.3600 ▲
  • GBP/EUR: 1.1910 - 1.2030 ▲
  • GBP/AUD: 1.8780 - 1.8960 ▼
  • EUR/USD: 1.1220 - 1.1360 ▼