Pound-to-Dollar in Fed-inspired Setback

🎯 GBP/USD year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. Request your copy.

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The pound to dollar exchange rate trades at 1.3497, extending the week's loss to 1.14%.

The dollar perks up into the latter half of the week after the Federal Reserve showed it's in no rush to lower rates.

In fact, minutes from the world's most important central bank show several policymakers would be minded to raise rates if inflation proves sticky.

The midweek release of the minutes from the late-January meeting serves as a reminder there are still a lot of positives behind the dollar, despite it being 2026's underperformer.

"The near-term backdrop remains favourable: inflation is easing, labour markets are holding up and growth is still strong," says Karl Schamotta, chief analyst at Corpay. "At some point, that should support a hawkish repricing in the dollar."

What caught market attention was the message contained in the minutes that most of the Fed needs to see lower inflation before cutting rates again.

"The US dollar advanced by about 0.6% on a DXY basis yesterday and is now 1.2% stronger from the low hit on Wednesday of last week," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Bank. "The minutes released last night certainly have helped reinforce expectations that the FOMC could be on hold for a longer period."

Above: The dollar's performance this week.

"The dollar got a bid from the release of the FOMC minutes last night. Newswires latched onto the view that several participants would prefer a two-sided description of the Federal Reserve's future rate intentions to reflect that it could actually hike if inflation remained at above-target levels," says Chris Turner, lead FX analyst at ING Bank.

Frances Cheung, Head of FX and Rates Strategy at OCBC says the key takeaway from the minutes is that Committee members remain split in their opinions towards the inflation and the labour market outlook, which means the Fed is in a wait-and-see mode.

"Our base-case remains for one 25bp cut this year, but we are reviewing the expected timing of this cut," he adds.

Above: The market has raised its expectations for the future direction of Fed rates over the course of February. This is intuitively supportive of USD.

The minutes also revealed the New York Federal Reserve checked rates in USD/JPY in conjunction with Japanese authorities and on behalf of the U.S. Treasury on Friday, 23rd January, when USD/JPY was trading around 157. 

"Something like this is extremely rare in foreign exchange markets and is a sign of a more activist White House when it comes to FX," says ING's Turner.

Economic data in the U.S. remains resilient and a static Federal Reserve policy rate can help the dollar. However, the activist preference for a weaker dollar under the Trump administration reminds us of significant policy-related headwinds.

ING's Turner says the dollar could drift a little higher from here, "but we think the market's sell dollar rally mentality remains."

🎯 GBP/USD year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. Request your copy.