The USD has rallied against the GBP over the past 48hrs following the latest Fed and BoE meetings and an increase in risk-aversion.

As expected, the Federal Reserve interest rate meeting on Wednesday night was a bit of a non-event. There was a unanimous vote to keep rates on hold and there was very little change to the bank’s statement, which was an almost word for word replication of the January meeting. Importantly for markets, there was no softening in the Fed’s stance on inflation, with policymakers repeating the line that it does not expect to start easing policy until it has ‘greater confidence inflation is moving sustainably to the 2% target’.

Sterling weakened yesterday after a ‘dovish hold’ from the Bank of England. Two of the previous hawks changed their votes this month to favouring no change which meant nearly all favoured to keep things on hold (bar one who voted for a rate cut). The central bank also reiterated that it is ‘not yet at the point’ where it can start cutting rates, although it also added a line to its communications that conditions for lower rates were ‘moving in the right direction’. This week’s UK inflation report for February surprised to the downside and there appears a general sense of optimism among BoE members as to its downward trajectory. Indeed, the BoE sees inflation falling below 2% in a matter of months, which markets believe opens the door to the first rate cut in the not too distant future (three-in-four change for first cut in June).

As a result, the Pound has lost ground against the USD with the GBP/USD falling nearly 2-cents in the past 24hrs with it now trading towards a 1-mth low. The GBP/EUR has slipped nearly 1-cent in the past 24hrs and now trades around a 2-mth low. Next up, markets will be watching this afternoon’s Fed Chair Powell speech for any further clues.

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