Dollar Strengthens After Fed Rate Hike; Pound Slips on UK Inflation Data

The U.S. dollar extended its gains to a sixth consecutive session on Wednesday after the Federal Reserve delivered a widely expected interest rate hike, its first since July 2023. Meanwhile, the British pound came under pressure after data showed an acceleration in U.K. consumer inflation.

At 2:25 PM ET (02:25 GMT), the U.S. Dollar Index (DXY), which measures the greenback against a basket of six major currencies, was up 0.4% at 99.89, according to Investing.com data.

Federal Reserve Hikes Rates by 25 Basis Points

The Federal Open Market Committee (FOMC) unanimously voted to raise its benchmark federal funds rate by 25 basis points to a target range of 3.75% to 4.00%. This widely anticipated move marked the first tightening of monetary policy in over three years.

The central bank's updated economic projections, often called the "dot plot," also signaled that policymakers anticipate one additional rate increase before the end of the year. The decision followed a period of resilient U.S. economic data, a robust labor market, and persistently high inflation, with the Fed's preferred gauge running at 3.7%, well above its 2% target.

Pressure on the Fed to act had also been mounting from the bond market, where a recent sell-off pushed the 10-year Treasury yield to its highest level since 2007. Brent Wilsey, Chief Investment Officer at Wilsey Asset Management, told Investing.com that the Fed was facing "pressure from the bond market to raise rates."

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Pound Weakens as UK Inflation Accelerates

In other major currency trading, the British pound fell 0.2% against the dollar to trade at $1.3447. The move came after the U.K.'s Office for National Statistics reported that the annual Consumer Price Index (CPI) rose to 3.1% in August from 2.9% in July, its fastest pace since March.

The inflation data was released just one day before the Bank of England's (BoE) upcoming interest rate decision. While the central bank is widely expected to hold rates steady, swaps markets now price in roughly a one-in-three chance of a hike at this meeting, according to market data cited by Investing.com.

"The task of getting inflation to 2% is getting harder," said Sanjay Raja, chief UK economist at Deutsche Bank. "Risk management considerations are growing, and the possibility of a near-term rate hike is rising."