Sterling hovered near flat in early NorAm trading amid diminished May Day holiday liquidity, but traders are likely to target this year's lows if the Fed sounds more hawkish than expected when delivering its widely forecast decision to hold rates steady later on Wednesday.
The expectation of unchanged rates has left markets focused on nuances of the policy statement and the post-meeting presser by Fed Chair Jerome Powell.
Rates continue to hold significant sway among major currencies.
Early 2024 GBP/USD strength owing to G7-leading UK inflation has unraveled recently as BoE rate expectations have fallen, converging with the U.S. and other major economies.
While the rate of UK inflation's fall has tapered slightly since February, the continued downward path has boosted BoE rate cut expectations, with futures markets now projecting earlier and deeper BoE rate cuts than the Fed.
This has weighed on GBP net spec positioning 1096742NNET, which has dropped from the mid-March highs of +70,451 contracts to -26,233 contracts as of April 23.
With the Fed expected to keep rates steady and futures markets pricing barely more than one U.S. cut in 2024 -- versus six in early 2024 -- risks are likely to remain tipped to the downside for GBP/USD.
If Fed expectations remain less dovish, sterling's recent 2024 low at 1.2299 may be targeted.
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