GBP/USD returns closer to mid-1.3100s, eyes FOMC/BoE meetings this week

VaselineSeptember 16, 2024

0 3 minutes read

GBP/USD returns closer to mid-1.3100s, eyes FOMC/BoE meetings this week

GBP/USD starts the new week on a positive note amid the prevailing USD selling trend.
Growing bets on a 50 bps Fed rate cut and upbeat market sentiment are undermining the dollar.
Bulls may refrain from placing aggressive bets ahead of key central bank risks.

The GBP/USD pair is pulling some buying off on the first day of a new week amid relatively thin trading conditions on the back of a holiday in China and Japan. Spot prices are currently trading around the 1.3135-1.3140 region, up just over 0.10% on the day and remain close to the one-week high hit on Friday amid a prevailing selling trend in the US dollar (USD ).

The USD Index (DXY), which tracks the greenback against a basket of six currencies, is languishing near its YTD low set in August amid expectations for more aggressive policy easing by the Federal Reserve (Fed). In fact, traders are more likely that the US central bank will cut borrowing costs by 50 basis points (bps) later this week after data released last week provided further evidence that US inflation is easing. This keeps US Treasury yields down near 2024 lows and the USD tracks on the defensive.

Apart from that, a generally positive risk tone further undermines the greenback’s relatively safe-haven status. Sterling (GBP), on the other hand, is benefiting from expectations that the Bank of England (BoE) will ease policy less than the Fed over the next year. Markets, however, are still betting on more BoE rate cuts, especially after data released last week indicated a slowdown in UK wage growth and a steady GDP print for the second straight month in July. This could prevent the bulls from placing aggressive bets around the GBP/USD pair.

Investors may also prefer to stay on the sidelines ahead of key risks from central bank events this week. The Fed is scheduled to announce its decision at the end of a two-day policy meeting on Wednesday. This will be followed by the BoE meeting on Thursday, which will play a key role in influencing the next stage of a directional move for the GBP/USD pair. However, the fundamental context favors the USD bears and supports the prospects of extending the pair’s rebound from the psychological 1.3000 level or a multi-week low reached last Wednesday.

Fed FAQ

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability and to promote full employment. Its main tool for achieving these objectives is the adjustment of interest rates. When prices rise too quickly and inflation is above the Fed’s 2 percent target, it raises interest rates, raising borrowing costs throughout the economy. This results in a stronger US dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates to encourage borrowing, which hurts the greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. Twelve Fed officials attend the FOMC—the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve rotating one-year terms. .

In extreme situations, the Federal Reserve can resort to a policy called Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy higher quality bonds from financial institutions. QE usually weakens the US dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of bonds it holds at maturity to buy new bonds. It is usually positive for the value of the US dollar.

VaselineSeptember 16, 2024

0 3 minutes read

Fed FAQ

Vaseline

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