British Pound sinks as Warsh’s hawkish dots power US Dollar

The British Pound (GBP) collapses during the North American session on Wednesday as the Federal Reserve (Fed) kept interest rates unchanged, but the dot plot hinted at a divided central bank, with half of the 18 dots forecasting higher interest rates by the end of 2026, which boosted the Greenback. The GBP/USD pair trades volatily within the 1.3350-1.3400 range, down 0.52%.

Sterling GBP/USD slides as Fed projections revive higher-rate risks

In the statement, the Fed eliminated forward guidance language, marking Kevin Warsh’s first lead on monetary policy. The Fed recognized that the economy continues to grow strongly despite uncertainties surrounding the Middle East conflict, and noted that the jobs market remains stable, with the unemployment rate staying nearly unchanged.

Furthermore, “Inflation remains elevated relative to the Committee’s 2 per cent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.”

The Summary of Economic Projections (SEP) indicates that the median forecast is for the Fed Funds Rate to finish at 3.8%, up from 3.4% in March. The economy is expected to expand by 2.2% by the end of 2026. Meanwhile, Core PCE, the Fed’s preferred inflation measure, is projected at 3.3%, which is 1.3% above the Fed’s 2% target.

GBP/USD reaction to the decision

The GBP/USD tanked to a four-day low of 1.3334 before finding some relief, yet traders are bracing for the press conference of the new Fed Chair, Kevin Warsh. If he leans dovish, a recovery towards 1.3400 is possible, but most of the Federal Open Market Committee (FOMC) favors higher rates. If that’s reassured by Warsh, a test of 1.3300 is on the cards.