Pound-to-Dollar exchange rate volatility has dwindled following steep falls on Monday, as traders reduce exposure ahead of Federal Reserve and Bank of England updates.

Pound-Dollar declined by more than 0.5% on Monday to stand at 1.3644 at the time of writing.

"Although risk aversion has abated for now, the continued safe-haven allure of the USD will limit it's setbacks while markets remain cautious, as will fears of a hawkish surprise from the U.S. Federal Reserve on Wednesday," said Reuters market analyst, Richard Pace.

Many investors anticipate the Fed will provide an indication as to when it will begin tapering its quantitative easing programme.

"Although domestic demand has slowed and COVID cases are rising, we think concerns about supply bottlenecks and uncertainty about the inflation outlook will keep the Fed inclined to taper sooner than later," according to Juan Prada, an analyst with Barclays.

Reuters analyst, Pace added: "Investors still expect the Fed to signal their intention to taper this week, but that it won't start before the end of 2021, so the risk of a hawkish surprise and stronger USD is therefore tied to forward projections about interest rates from committee members – the dot plot.”

One rate hike is forecast in 2022 and two in 2023 as "it would take the dots to show two hikes in 2022, or four or more in 2023, to generate a hawkish reaction," said Pace.

Moreover, volatility is forecast for GBP/USD on Thursday when the Bank of England makes its latest announcement. Even though no policy changes are predicted, Sterling could benefit if more than one member of the Monetary Policy Committee (MPC) votes to end quantitative easing straight away.

"We retain our caution on GBP given the headwinds to growth from supply constraints, withdrawal of government support schemes and higher taxation. The market is already priced for two hikes in 2022 so the risk is that data ends up making 'tightening too frightening' as our economists like to say," said Daragh Maher, Head of Research, Americas, at HSBC.