Above: File image of Jerome Powell. Source: Federal Reserve.

The Dollar was softer across the board after the Federal Reserve maintained interest rates at existing levels and signalled little appetite to raise interest rates again.

The Fed left the target range for the federal funds rate at 5.25-5.50% and released a statement that maintained guidance that the Fed remains ready to raise rates again if the data warrants such a move.

"Evidence of growth persistently above potential, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy," said Fed Chair Powell in a press appearance following the decision.

But this was as 'hawkish' as the event got. "Given how far we have come [on rates and disinflation], along with the uncertainty and risks we face, the committee is proceeding carefully," added Powell.

Analysis from UniCredit Bank notes Powell appeared to dismiss the usefulness of the September 'dot plot' chart, which signalled the Fed's Open Market Committee (FOMC) favoured one more rate hike this year.

Powell said that the efficacy of the dot plot "decays between meetings".

"The dollar has been a little weaker over the last 24 hours," says Chris Turner, head of FX research at ING Bank. "Despite the Fed retaining a tightening bias, it seems investors are more interested in reading and trading a Federal Reserve pause."

Economists at UniCredit reckon the Fed is done with rate hikes, as economic activity is likely to slow. This eases pressure on U.S. bond yields and boosts risk sentiment, two developments that aren't supportive of the Dollar.

"The USD retreated somewhat across the board following the FOMC meeting outcome," says Roberto Mialich, FX Strategist at UniCredit Bank. "The weaker USD also helped sterling recover back above 1.2150."

The Pound to Dollar exchange rate tested a low of 1.2095 ahead of the Fed decision but recovered to close the day at 1.2151 and is higher at 1.2180 at the time of writing Thursday.

The exchange rate appears to be flatlining in the short term, with 1.2180 acting as a fulcrum in an increasingly limited range.

"Powell acknowledged that monetary conditions have tightened, alluding to the sharp selloff in treasuries, and traders reacted by swiftly pricing in the reduced chances of another rate hike during the current cycle. However, the downside for the greenback was limited; rates may have peaked, but they are likely to remain at the current high levels until mid-2024," says Ricardo Evangelista, Senior Analyst at ActivTrades.

GBPUSD is left looking for a fresh signal to break either higher, and bury the post-August downtrend, or lower and go sub-1.20.

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The Bank of England is the next major event for the Pound and the market is fully priced for rates to be left at 5.25%.

Like the Fed, the Bank is expected to maintain guidance that it stands ready to raise interest rates again if the data warrants it.

But this message risks being undermined by any member of the Monetary Policy Committee opting to break ranks and vote for a rate cut, a likelihood we consider in more detail here.

The economic forecasts contained in the Monetary Policy Report will also be important for markets: if growth and inflation forecasts are cut, the 'higher for longer' message on interest rates risks being undermined.

"The GBP reaction to the BoE could depend on the price action in UK rates and gilt yields. Many negatives related to the recent UK data developments are already in the price of the GBP," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

FX investors are meanwhile positioned 'short' on the GBP vs the USD and EUR, according to Crédit Agricole's latest FX positioning data.

"We therefore believe that the currency could benefit from any confirmation of the BoE’s ‘higher for longer’ outlook," says Marinov.

Any undermining of the 'higher for longer' message would potentially result in Pound-Dollar weakness. However, the Dollar remains the dominant partner in this pairing, and only when it reignites its strength or retreats will Pound-Dollar see some real directional change.