The Federal Reserve hikes back above Britain's cash rate
- GBP/USD slides to 1.3400 after the Fed, 91 pips below the day's high
- Fed's rate rises to 3.75-4.00%, passing the Bank of England's 3.75%
The Fed has raised its rate to 3.75-4.00%, its first increase since 2023 and its first move since the cut in December 2025. Bank Rate, the Bank of England's own rate, has been 3.75% since December 2025. Take the middle of the new American range and money held in Pounds stops paying more than money held in Dollars and starts paying less, which is the mechanism this pair runs on. British inflation reached 3.1% in August, exactly the forecast, and the rise came from motor fuel rather than from anything domestic. The American vote was unanimous at 12-0 and the statement gave no guidance, but the projections put the rate at 4.1% by December and at 4.1% again through 2027, which is one more increase and no reductions. Britain's rate is now the lower of the two. The Bank of England gets to answer that at 11:00 GMT tomorrow, and is forecast not to.
The decision bar covered 39 pips and the pair has lost another nine since, with the low set a few pips under where it now trades. It changes hands just above 1.3400, roughly 32 pips below where it sat going into 18:00 GMT and 35 pips beneath the 200-day Exponential Moving Average (EMA) near 1.3450, which this morning's low had gone a single pip under and recovered from. The day's high just short of 1.3500 was set on the 06:00 GMT inflation release, which makes the session's range 91 pips. The five-minute momentum gauge reads near 54, which is mid-range, because the fall came in two legs with a bounce between them.
GBP/USD 5-minute chart
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Joshua Gibson
FXStreet
Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.
