Pound–Dollar Strength Seen Intact Even if Fed Delivers a Hawkish Cut
- Written by: Gary Howes
Above: Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.
Setbacks to GBP/USD set to be shallow into year-end.
The British pound can ride out any midweek setback against the dollar in the event of a "hawkish cut' at the Federal Reserve.
This would entail the Fed cutting the Fed Funds rate 25 basis points, but not giving any clear commitment to further hikes. i.e. a 'hawkish' outcome in that it frustrates any hopes for a commitment to going further in the coming months.
Notionally, anything with the word 'hawkish' attached to it would boost the dollar.
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"Powell will probably maintain a guarded tone on future easing. This would result in a hawkish cut," says Gilles Moec, Chief Economist at AXA.
"The dollar is trading sideways against all of its major counterparts as traders brace for tomorrow’s Federal Reserve decision," says Karl Schamotta, Chief Market Strategist at Corpay.
"Most participants expect Chair Powell to recite a slightly hawkish and now-familiar refrain in tomorrow’s post-decision press conference: patience, data dependence, and caution in the face of lingering uncertainty," he adds.
The dollar has struggled through November and December as bets for a Fed cut at this Wednesday's policy announcement steadily built.
However, markets remain guarded as to the prospect of further reductions in 2026, owing to America's still elevated rates of inflation.
Given this, Moec says any "market reaction may be muted... as investors already anticipate only moderate easing despite the clear prospects of the appointment of Kevin Hassett as the Fed."
A muted market reaction implies limited scope for the dollar to advance meaningfully, thereby insulating the pound to dollar exchange rate (GBP/USD) against any meaningful setbacks.
Above: GBP/USD at daily intervals showing a break above the 21- and 55-day exponential moving averages.
GBP/USD rose to 1.3385 last week, its highest level since October 21, in a surge that flips the short-term outlook to constructive.
The move saw the pair break above the 21-day and 55-day exponential moving averages (EMA), which our latest Week Ahead Forecast says is a sign of building upside momentum.
From here, we anticipate further upside and a potential test of 1.34 later in the week, provided the Federal Reserve decision doesn't rejuvenate the dollar, which as discussed, looks to be a low probability outcome.
Should Fed Chair Jerome Powell surprise markets with an unambiguous 'hawkish' message, we would look for pound-dollar to edge back to the confluence of support at the MA's, approximating to 1.3250.
