Forex - GBP/USD soars as Fed holds off on tapering stimulus

The pound shot up to eight-month highs against the dollar on Wednesday after the Federal Reserve left interest rates unchanged and surprised many by keeping its USD85 billion monthly bond-buying program in place as well.

Many market watchers were expecting the Fed to announce plans to trim the amount of bonds it buys each month, a stimulus tool known as quantitative easing that spurs recovery by driving down interest rates, weakening the greenback in the process.

In U.S. trading on Wednesday, GBP/USD was trading at 1.6112, up 1.31%, up from a session low of 1.5893 and off from a high of 1.6122.

Cable was likely to find support at 1.5885, Tuesday's low, and resistance at 1.6188, the high from Jan. 17.

The Federal Reserve on Wednesday left its key benchmark lending target, the fed funds rate, unchanged at 0.25% and kept its USD85 billion monthly asset-purchasing program in place. 

The Fed said the economy was showing signs of improvement though it still faced enough headwinds to prompt monetary authorities to hold off on tapering its asset purchases, which weaken the dollar to spur recovery. 

The Fed said in a statement that household spending and business fixed investment have improved, while the housing sector has been strengthening as well.

However, mortgage rates have risen, while U.S. fiscal issues are restraining economic growth.

"Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy," the Fed said. 

"However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," the Fed said, adding it would continue to buy USD40 billion a month in mortgage-backed securities and USD45 billion in longer-term Treasury securities.

"Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate."

Elsewhere, the pound enjoyed support after the release of the minutes of the Bank of England's most recent meeting, which showed that policymakers voted unanimously in favor of keeping the benchmark interest rate on hold at 0.5% and the size of the bank’s asset purchase facility unchanged at GBP375 billion.
The pound, meanwhile, was up against the euro and up against the yen, with EUR/GBP down 0.24% at 0.8378 and GBP/JPY up 0.23% at 158.02.

On Thursday, the U.S. is to release the weekly report on initial jobless claims, as well as the Philly Fed manufacturing index and data on existing home sales.