• Federal Reserve maintains rates, citing robust labor market and elevated inflation levels.
• Dot-plot reveals officials’ expectations for the Federal Funds Rate to reach 5.6% by the year’s end, hinting at further tightening.”
• Fed forecasts bolstered growth at 1% in 2023 and a lower unemployment rate but anticipates elevated inflation with Core PCE estimated at 3.9%.

GBP/USD dropped after the US Federal Reserve (Fed) held rates unchanged, in a buy-the-rumor, sell-the-fact reaction, as the GBP/USD is set to erase some of its earlier gains, which saw the GBP/USD reaching a new year-to-date (YTD) high at 1.2698. At the time of writing, the GBP/USD is trading volatile at around the 1.2690/1.2640 area as traders brace for Jerome Powell’s press conference.

Summary of the Federal Reserve’s monetary policy statement

In its monetary policy statement, the Federal Reserve said the labor market remains robust, with the unemployment rate low and inflation remains elevated. Furthermore, tighter conditions are likely to weigh on economic activity; therefore, according to the statement, policymakers decided to keep rates unchanged, which will “allow the Committee to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Regarding the dot-plot, revealed in the Summary of Economic Projections (SEP), officials revised upwardly, with most expecting the Federal Funds Rate (FFR) to hit 5.6% this year. Hence, Jerome Powell and Co. are evaluating 50 bps of additional rate hikes, up from the 5.10% projections in March.

Federal Reserve officials projected growth at 1% in 2023, up from 0.4% in March, and the Unemployment rate was downward revised from 4.5% to 4.1%. The Fed’s preferred gauge for inflation, the Core PCE, is estimated at 3.9% compared to March 3.6%, while general PCE is estimated at 3.2% from 3.3%.

GBP/USD reaction to the news headline

The GBP/USD edged from 1.2680 and cracked the R1 daily pivot, as it hit 1.2626, before stabilizing around the current exchange rate at around 1.2640. Should be said that it fell shy of breaking below Tuesday’s high, at 1.2624, seen as the next support before tumbling to 1.2600.