The US Federal Reserve raised its benchmark interest rate by a quarter point to a range of 3.75-4.00% on Wednesday, marking the first hike since 2023. The unanimous 12-0 vote puts the midpoint at 3.875%, which now exceeds the UK's Bank Rate of 3.75% for the first time this year [1]. This shift has led to a pronounced drop in GBP/USD, with the pair trading just under 1.3400 and falling below its 200-day average—a level not breached since early August. Wednesday's decline was the largest since September 10, and the bearish momentum is reflected in the Stochastic Relative Strength Index, which remains flat at 16, indicating stretched selling conditions [1].
The Fed's forecasts suggest the rate gap will widen further, projecting its rate to reach 4.1% by year-end and remain at that level through 2027. The Fed also expects US unemployment to stay at 4.1% through 2029, below its perceived normal rate of 4.2%. The central bank does not anticipate pausing rate hikes for at least a year, reinforcing the negative outlook for the Pound as it trades against this widening gap [1].
The Bank of England is set to meet on Thursday at 11:00 GMT, with expectations that it will hold its rate at 3.75%. The anticipated vote split is six to hold and three to raise, mirroring July's outcome when Chief Economist Pill and external members Greene and Mann advocated for a hike to 4%. The key market focus is on the vote distribution rather than the rate itself, as a shift in voting dynamics could signal a change in the Pound's rate advantage. UK inflation was reported at 3.1% in August, matching forecasts, with the increase primarily driven by motor fuel. Factory gate prices rose 0.7% against a 0.3% forecast, providing some argument for a rate hike [1].
Technical levels for GBP/USD include resistance at 1.3400, the 200-day EMA just under 1.3450, and 1.3500, while support is seen at Wednesday's low just above 1.3350 and then at 1.3300. The bias remains bearish below 1.3400, with objectives at 1.3350 and 1.3300. A daily close above 1.3450 would negate the bearish case [1].
CONCLUSION
The Fed's rate hike has shifted the interest rate advantage to the US, driving GBP/USD below key technical levels and reinforcing a bearish outlook. Market participants are closely watching the Bank of England's vote split for signs of potential policy shifts, but the prevailing sentiment remains negative for the Pound as the rate gap is expected to widen further.