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GBP/USD - The Fed brings Out the Big Guns

The biggest latest development in the market is the higher-than-expected increase in interest rates which was confirmed last night by the Federal Open Market Committee. Originally, the market had expected an alteration of 50 basis points, however, with the new inflationary figures, the Fed decided to increase interest rates by 75 basis points. This was also confirmed yesterday as major players in the market, such as JP Morgan and Barclays, also amended their predictions.

Even with the hawkish news, the price of the exchange rate moved against the US Dollar throughout the day but has started declining since the opening of the Asian Markets. The price movement in favor of the US Dollar is currently not showing major signs of high volatility and momentum. This is most likely due to traders waiting for further clarification from the Bank of England later today.

This morning, the price movement has declined by 42 PIPs so far, which amounts to a decline of 0.35%. As European, UK, and US trading markets open the volatility is likely to increase. Traders are currently mainly being influenced by the new interest rate hikes and high inflation figures. But as previously mentioned, traders are also waiting for the Bank of England.

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The UK's central bank is scheduled to announce its Official Bank Rate which is predicted to increase by 25 basis points, as well as its Monetary Policy Statement. The scheduled release is also likely to create high volatility.

With regards to the US central bank, the interest rate hikes turned out to be exactly what many analysts projected. The interest rate was raised immediately by 0.75%, although a correction of 50 basis points was previously expected. The Fund Rate now stands at 1.75% which is the highest since the COVID-19 outbreak in the US.

The Chair of the Federal Reserve, Mr. Powells, also signaled a further tightening of monetary policy, including the most aggressive measures, if the situation requires it. The Fed's updated forecast assumes an increase in the key rate to 3.4% by the end of the year. This would mean that the regulator needs to raise the current value by another 175 basis points. This would be the highest the Fund Rate has been since the 2007-2008 banking crisis.

Traders are also trading cautiously with the Pound as the market fears the economy could edge towards a recession. The UK economic statistics remain much lower than that of their US partners. The main concern is the UK GDP which slowed down to 3.4%.

In addition, experts spread a word of caution with regards to the reduction in real incomes of UK citizens, which fell by -3.4% in April for the first time in the last 21 years. The decrease in the indicator in annual terms was -2.2%, which has not happened for 11 years. Wage growth indicators in the UK remain positive and wages are generally increasing, however, the high inflation is eating up most gains and in most cases, citizens are still worse off.

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Lastly, it is important to evaluate the performance of the USD not only against the Pound but against the market in general. The US Dollar Index, which provides the value of the US Dollar against six currencies, is also on the rise this morning, increasing to 104.93. Even with yesterday’s decline, the price of the index remains high and above-average prices.

Traders are looking to see if the US Dollar is able to continue its trend against the GBP which originally started 13 months ago.

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