- GBP/USD traders move to the sidelines ahead of the FOMC/BoE policy meetings this week.
- Rising Bets for a 50 bps Fed rate cut keep the USD bulls on the defensive and lend support.
- Traders now look to the US Retail Sales to grab short-term opportunities later this Tuesday.
The GBP/USD pair oscillates in a narrow trading band just above the 1.3200 mark during the Asian session on Tuesday and consolidates the previous day's strong move up to over a one-week high. Investors opt to move to the sidelines ahead of the key central bank event risks – the highly-anticipated two-day FOMC meeting starting this Tuesday and the Bank of England (BoE) policy update on Thursday.
The Federal Reserve (Fed) is scheduled to announce its decision on Wednesday and the markets are currently pricing in over a 60% chance of an oversized 50-basis points interest rate cut amid signs of easing inflationary pressures. This keeps the US Treasury bond yields depressed at one or two-year lows and fails to assist the US Dollar (USD) to register any meaningful recovery from the YTD low, which, in turn, is seen acting as a tailwind for the GBP/USD pair.
The British Pound (GBP), on the other hand, is underpinned by expectations that the BoE's rate-cutting cycle is more likely to be slower than in the United States (US). That said, investors are still betting on more BoE rate cuts, especially after data released last week pointed to a slowdown in the UK wage growth and a flat GDP print for the second straight month in July. This might hold back traders from placing aggressive bullish bets around the GBP/USD pair and cap the upside.
Moving ahead, there isn't any relevant market-moving economic data due from the UK on Tuesday, leaving spot prices at the mercy of the USD. Later during the early North American session, traders will take cues from the release of US Retail Sales data, which, along with the US bond yields, will influence the USD demand and provide some impetus to the GBP/USD pair. Nevertheless, the aforementioned fundamental backdrop warrants some caution for aggressive traders.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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