Sterling holds steady as markets await Fed decision

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LONDON, May 1 (Reuters) – The pound held steady on
Wednesday as traders waited for the Federal Reserve’s interest
rate decision later in the day for hints about when U.S.
borrowing costs might start to fall.

Sterling was last effectively unchanged from
Tuesday at $1.2488, after falling 0.55% the previous day as the
dollar rallied on the back of strong U.S. economic data.

The euro was also roughly flat at 85.46 pence,
within the tight range it has traded in since the start of the
year.

Global markets were relatively subdued, with traders off for
May Day or International Workers’ Day in many countries.

The Fed announces its decision at 2 p.m. ET (1800 GMT) and
is widely expected to leave rates at 5.25% to 5.5%. Investors’
focus will be on Chair Jerome Powell’s comments on the recent
string of stronger-than-expected economic data, which could
influence the dollar and global currency markets.

Data on Tuesday showed that growth in U.S. labour costs
accelerated in the first quarter of the year, sparking a rise in
U.S. bond yields and the dollar that weighed on sterling, the
euro and other major currencies.

The pound has fallen 1.9% this year as the dollar has risen,
although it has outperformed the euro’s 3.4% drop thanks partly
to a stronger economy and price pressures.

Traders on Wednesday pushed back their expectations for the
first Bank of England interest rate cut so that they no longer
fully expect one by September, in the wake of Tuesday’s U.S.
data.

Analysts say other major central banks will find it more
difficult to cut interest rates if the Fed is leaving them on
hold, not least because it could trigger a sharp drop in their
currencies.

“The start of the BoE’s rate-cutting cycle should see GBP
weaken,” said Paul Mackel, head of FX research at HSBC, in a
note.

“HSBC Economics expects the BoE to begin cutting rates in
June, which should start mechanically compressing the nominal
yields of the currency versus those that are not rushing to
cut.”

Data on Wednesday showed that British house prices fell
unexpectedly for a second month running during April, pointing
to some moderation in the recent recovery in housing market
activity.

Separate data showed British manufacturing fell back into
contraction in April, although sterling showed little
discernible reaction.

(Reporting by Harry Robertson; Editing by Alex Richardson)



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