Pound Declines Against US Dollar Ahead of Fed and BoE Policy Decisions.
The Pound Sterling (GBP) is facing a downturn, struggling to hold above the 1.3000 level against the US Dollar (USD) as global markets remain cautious ahead of key monetary policy decisions from both the Federal Reserve (Fed) and the Bank of England (BoE). Investors are treading carefully as they anticipate the impact of upcoming economic projections and the potential consequences of US President Donald Trump’s tariff policies.
As of Wednesday’s North American trading session, GBPUSD has corrected downward to 1.2960, unable to sustain its previous rally beyond the 1.3000 mark. The market sentiment is in a state of uncertainty as traders await the Federal Reserve’s monetary policy statement, scheduled for 18:00 GMT, alongside the Fed’s dot plot and the Federal Open Market Committee’s (FOMC) Summary of Economic Projections (SEP).
Federal Reserve Policy Expectations and Market Reactions.
According to the CME FedWatch tool, the Federal Reserve expected to keep interest rates steady within the 4.25%-4.50% range for the second consecutive meeting. While the rate decision itself widely anticipated, the primary focus will be on the Fed’s forward guidance—particularly the dot plot, which indicates where policymakers expect interest rates to be in the medium and long term.
The US Dollar’s strength in recent weeks has been driven by expectations that the Fed will maintain a hawkish stance, despite signs of easing inflation. In February 2025, the annual core Consumer Price Index (CPI), which excludes volatile food and energy prices, rose by 3.1%—the lowest level since April 2021. This suggests that inflationary pressures are gradually subsiding, but Fed policymakers may still be reluctant to commit to rate cuts too soon.
Additionally, Trump’s economic policies have introduced fresh uncertainties into the inflation outlook. The US President has announced plans to impose reciprocal tariffs, which could lead to higher import costs and, consequently, higher inflation. Analysts at Fitch Ratings estimate that these tariff shocks could increase inflation by 1 percentage point in the near term. If inflationary pressures resurface due to tariffs, the Fed may delay interest rate cuts until late 2025 rather than making an early move in June, as some investors had hoped.
Despite these concerns, the CME FedWatch tool still indicates a strong possibility of a rate cut in June, as market participants remain optimistic that the Fed will prioritize economic growth over inflationary fears. The upcoming FOMC statement and Fed Chair Jerome Powell’s press conference will provide crucial insights into whether the Fed is leaning toward a more dovish or hawkish stance in the coming months.
Pound Sterling Struggles Ahead of BoE Policy Decision.
While the US Dollar has been influence by Fed policy expectations and trade concerns, the Pound Sterling’s movement has been shape by domestic economic conditions and the Bank of England’s upcoming monetary policy decision.
Investors are closely watching the release of the UK labor market data for the three months ending January, which will play a key role in shaping expectations for the BoE’s next steps. One of the most significant data points will be the Average Earnings report, as wage growth has been a primary driver of inflation in the UK’s services sector.
Recent data from Brightmine, a leading UK provider of labor market analytics, suggests that pay growth begun to slow as business owners prepare for an increase in payroll taxes in April 2025. The UK Chancellor of the Exchequer, Rachel Reeves, announced in the Autumn Budget that employers’ contributions to National Insurance (NI) would rise from 13.8% to 15%.
This increase in business costs has already prompted many firms to reconsider their hiring strategies. According to Brightmine’s report, several businesses are implementing hiring freezes or restructuring their workforce in response to rising labor costs. Some employers are even contemplating pay freezes or delaying salary increases, which could weigh on overall consumer spending and economic growth.
Despite these concerns, analysts still expect UK Average Earnings (both including and excluding bonuses) to remain steady at 5.9%, a level that remains historically high and could continue to exert inflationary pressures on the UK economy.
Bank of England’s Policy Outlook and Market Implications.
The Bank of England (BoE) set to announce its monetary policy decision on Thursday, with widespread expectations that it will keep interest rates steady at 4.5%. The central bank’s Monetary Policy Committee (MPC) is expected to vote 7-2 in favor of maintaining the current rate, with policymakers Catherine Mann and Swati Dhingra likely advocating for a rate cut.
The BoE’s decision will be particularly crucial given the backdrop of Trump’s tariff policies and their potential global repercussions. The US administration’s decision to impose reciprocal tariffs on April 2 could lead to increased costs for UK exporters, adding another layer of uncertainty to the UK’s economic outlook.
BoE Governor Andrew Bailey’s commentary will be closely analyzed for any signs of a shift in the central bank’s policy stance. If Bailey signals that the BoE is moving closer to considering rate cuts, it could put additional downward pressure on the Pound Sterling. Conversely, if he maintains a hawkish stance, emphasizing concerns about persistent inflation, the GBP could find some support in the near term.
Trump’s Reciprocal Tariffs: A New Source of Volatility.
Adding to market anxieties is US President Donald Trump’s trade policy shift, which could have a significant impact on global financial markets. On Tuesday, US Treasury Secretary Scott Bessent confirmed that the reciprocal tariffs would take effect on April 2.
These tariffs designed to mirror the trade barriers imposed by other countries, effectively introducing retaliatory duties on imports from nations that have existing tariffs on US goods. While the full details of the tariffs remain unclear, Bessent suggested that some tariffs could be avoided if pre-negotiated deals are reached before the deadline.
The implementation of these tariffs could lead to:
Increased inflationary pressures in the US and global economy, potentially delaying central bank rate cuts.
Higher costs for UK businesses exporting to the US, further impacting the Pound Sterling and UK economic growth.
Heightened market volatility, particularly in currency and commodity markets, as traders react to changing trade dynamics.
While some analysts believe that Trump’s tariff policies are primarily a bargaining tool, others warn that they could trigger trade disputes and disrupt global supply chains.
Conclusion: Uncertainty Dominates Currency Markets.
The Pound Sterling continues to face significant headwinds ahead of key monetary policy decisions from both the Federal Reserve and the Bank of England.
The Fed expected to keep rates unchanged, but its economic projections and dot plot will determine market sentiment for the US Dollar.
The BoE is also likely to hold rates steady, but Governor Andrew Bailey’s commentary could influence future expectations for rate cuts.
Trump’s reciprocal tariffs add another layer of uncertainty, with potential inflationary and economic consequences globally.
With interest rates, inflation, and trade policy all in flux, currency markets are likely to remain volatile in the coming weeks. Traders and investors will need to stay vigilant, as the GBPUSD pair could experience further fluctuations based on upcoming economic data and policy statements.
