Pound Slips as Fed Prepares to Raise Rates
The British Pound has been drifting lower ahead of the Federal Reserve's interest rate decision on Wednesday. As of Tuesday, GBP/USD closed near 1.3470, down 0.2%. The Fed is expected to raise its rate for the first time since July 2023, which would put it a quarter-point above the Bank of England's 3.75% rate.
The market has priced in four hikes by the Bank of England by mid-2024 and gives Thursday's vote about a 15% chance of an increase. The difference between the two central banks is their calendars, with the Fed raising rates this week and the Bank of England holding steady since July.
Wednesday's UK inflation data could provide some support for the Pound, as it is forecast to peak at 3.1% in August, a quarter earlier than the Bank of England's projection. However, the labour market released on Tuesday showed a rise in unemployment claims and a decline in payrolled employees.
The gilt yield has traded near 5.4%, its highest since 2007, but Goldman Sachs believes the market may have priced in too many hikes.