Pound steady ahead of FOMC

The British pound has ticked higher, trading just above the 1.35 line in the North American session. We could see stronger movement from GBP/USD later today, after the release of the FOMC policy decision. The British pound is sensitive to risk, so a strong reaction from the financial markets will likely be reflected in the pound’s movement as well.

Investors are keeping both eyes on the FOMC policy meeting, although policy makers are not expected to make any changes in monetary policy. The markets are looking for clarity with regard to a rate lift-off and reduction in the balance sheet. The Fed is widely expected to start a series of rate hikes in March and to reduce the balance sheet in June.

Will Powell soothe fragile markets?

Fed Chair Powell has his work cut out for him at today’s meeting. Powell will need to pinpoint the right balance between responding firmly to inflation while being careful not to be overly aggressive in raising interest rates. The markets are clearly in a fragile mood, and if Powell does not provide a convincing performance, we could see strong volatility in the equity markets. Powell held onto the “inflation is transient” mantra for far too long, and he will need to convince the markets that the Fed is not panicking over surging inflation.

Another issue on the minds of investors is the escalating crisis between Russia and NATO over Ukraine. The US and Europe have pledged severe sanctions if Russia invades Ukraine, and the ball is squarely in Moscow’s court, with the world watching nervously. If there is an invasion or even a military flare-up, risk sentiment would fall and the safe-haven US dollar would likely get a boost at the expense of the pound and the other major currencies.

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GBP/USD Technical Analysis

• 1.3503 remains vulnerable and was tested during the day. Below, there is support at 1.3452
• GBP/USD faces resistance at 1.3647 and 1.3740

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