Sterling fell by over 1% on Wednesday after the Federal Reserve kept interest rates unchanged while stripping forward-guidance language from its statement, Kevin Warsh’s first as chair on monetary policy. GBP/USD dropped below 1.3300 to fresh two-month lows as the US Dollar strengthened. The Fed said the economy continues to grow strongly despite uncertainties linked to the Middle East conflict, while the jobs market remains stable and the unemployment rate nearly unchanged. It repeated that inflation is elevated relative to its 2% goal, partly due to supply shocks pushing up prices in sectors including energy.
The Summary of Economic Projections showed the median expectation for the Fed Funds Rate to end at 3.8%, up from 3.4% in March, while the economy is forecast to expand by 2.2% by end-2026. Core PCE inflation is projected at 3.3%, which is 1.3 percentage points above the Fed’s 2% target. In market moves, US Treasury yields rose, with the 2-year T-note up 15 basis points to 4.20%, adding pressure to GBP/USD.
Fed Stance and Policy Divergence
Given the Federal Reserve’s new, aggressive stance on inflation, we see continued strength in the US Dollar for the coming weeks. The removal of forward guidance creates uncertainty, but the message is clear: fighting inflation is the top priority. This environment supports a stronger dollar against currencies like the British Pound.
Recent data validates this hawkish position, giving the Fed room to maintain higher rates. The latest US jobs report showed a robust addition of over 270,000 jobs, while core inflation is persisting stubbornly above 3.4%, well over the Fed’s target. This combination of a strong economy and sticky prices means rate cuts are likely further away than the market previously anticipated.
This contrasts sharply with the situation in the United Kingdom, where the Bank of England is facing weaker economic growth forecasts of just 0.9% for this year. This policy divergence, with the US holding firm while the UK may need to consider cuts sooner, puts downward pressure on the GBP/USD pair. We view the recent break below the 1.3300 level as a key technical signal for further weakness.
Trading Strategy and Market Implications
In response, we are positioning for a continued fall in the pound against the dollar. We are looking at buying GBP/USD put options with strike prices near 1.3200 and 1.3150. This strategy allows us to profit from a downward move while clearly defining our maximum risk.
The new Fed Chair’s lack of explicit guidance means market volatility is likely to increase around key data releases. This makes options more attractive than outright shorting futures, as they can also benefit from a rise in implied volatility. We will pay close attention to the next US inflation report as the primary catalyst for the market’s next move.
