GBP/USD rose on Wednesday, recovering from a brief dip following above-forecast ADP job market data as the market remained focused on the potential for a dovish Fed 25bp rise later in the day, an outcome which should lift sterling toward 2023 highs.

Traders will examine the Fed announcement for indications of a policy shift.
Rate markets have completely factored out the possibility of a Fed hike in June and are pricing in two cuts in Q4 2023, according to IRPR on Eikon.

There is still the possibility of a tug-of-war between Fed policymakers over when to begin reducing rates.

With U.S. inflation well below its June 2022 high of 9.1% and moving steadily lower, some officials might see a halt in tightening as a prudent policy course to allow prior hikes to take effect.
A shift to lower rates will be less obvious as U.S. inflation still remains elevated.

A dovish Fed signal would be tonic for GBP/USD bulls.
With the BoE expected to tighten as many as three more times in H1 2023, sterling is likely to rally above its April 28 2023 high at 1.2584 and continue higher as U.S.-UK rate paths diverge.

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