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  • GBP/USD saw only a very muted immediate reaction to the release of the latest FOMC monetary policy decision.
  • The pair is lower on the day but trades back above 1.3700 again from earlier 1.3650 lows.

GBP/USD saw only a very muted immediate reaction to the release of the latest FOMC monetary policy decision, the bank holding its policy settings steady as expected. On the day, cable continues to trade lower by about 0.2% or just under 30 pips and is back above the 1.3700 level having at one point slipped as low as the 1.3660 area.

GBP outperforms

Note that GBP is one of the better performing G10 currencies on the day; some analysts have pointed to further optimism regarding the UK’s ongoing relative mass vaccination programme success as a sterling positive. At the very least, this is being attributed as a reason why EUR/GBP saw further depreciation on Wednesday; the EU’s programme, plagued by delays from both Pfizer and AstraZeneca, is painting the UK in a good light. Dovish ECB developments likely have more to do with EUR weakness on Wednesday, however, and this seems to have offered some support for GBP. With the ECB seemingly bringing more rate cuts back into the policy discussion and the BoE seemingly on hold for now (Governor Andrew Bailey doesn’t seem overly keen on negative rates), central bank divergence might be another factor to drive EUR/GBP downside, thus potentially coming to the aid of GBP/USD.

For now, though, focus returns to the FOMC; Chairman Jerome Powell will be commenting on the rate decision and taking questions from the press from 19:30GMT.

Fed policy settings on hold

As expected, the FOMC held rates at 0.0-0.25% and reiterated that this is where rates would stay until inflation runs moderately above 2% for some time, so that inflation averages 2% over time and longer-term inflation expectations remain well-anchored at 2%. Meanwhile, the Fed maintained the pace of their monthly asset purchases at $80B in treasuries and $40B in mortgage-backed securities and reiterated that purchases would continue at this pace until “substantial further progress” had been made towards the bank’s maximum employment and price stability goals. The Fed repeated that it remains committed to using its full range of tools to support the economy and that it remains prepared to adjust its policy settings as appropriate if risks emerge that could impede the attainment of its employment and price stability goals. The vote in favour of holding its policy-setting steady was unanimous.

On the economy, the Fed repeated that the pace of economic activity and employment had moderated in recent months, but, seemingly in acknowledgment of the recently observed weakening in economic momentum at the end of Q4 2020/early January 2021, said that noted that weakness is mostly concentrated in sectors most adversely impacted by the pandemic. The path forwards for the economy will depend significantly on the pandemic, including progress on vaccinations, said the bank. The public health crisis continues to weigh on economic activity, the bank added and still poses considerable risks to the outlook. Finally, on inflation, the Fed noted that weaker demand and earlier declines in oil prices was still holding down consumer inflation.