- GBP/USD attracts buyers for the second consecutive day amid dovish Fed-inspired USD weakness.
- Expectations that the BoE will cut rates less than the Fed also contribute to the positive move.
- Bulls may choose to stay on the sidelines ahead of the Fed and BoE meetings next week.
The GBP/USD pair is gaining positive traction for the second consecutive day and is recovering further from a more than three-week low around the psychological 1.3000 mark touched on Wednesday. The momentum is lifting spot prices to the 1.3100 zone, or a fresh weekly high during the Asian session, and is sponsored by the strongly bid tone surrounding the US Dollar (USD).
The US Dollar Index (DXY), which tracks the greenback against a basket of currencies, fell to over a one-week low amid mounting bets for a larger rate cut by the Federal Reserve (Fed), boosted by Thursday’s softer US Producer Price Index (PPI) report. Dovish Fed expectations keep US Treasury yields depressed near 2024 low, which, along with market optimism, weakens the safe-haven Dollar and acts as a tailwind for the GBP/USD pair.
Meanwhile, bulls seem unfazed by bets for more rate cuts from the Bank of England (BoE), especially after data released this week pointed to a slowdown in UK wage growth and flat GDP for the second consecutive month in July. However, markets think that the BoE will loosen policy less than the Fed over the next year. This, in turn, benefits the British Pound (GBP) and turns out to be another factor lending additional support to the GBP/USD pair.
However, it remains to be seen whether bulls can capitalize on the move or refrain from placing aggressive bets ahead of key central bank event risks next week. The Fed is scheduled to announce its monetary policy decision at the end of a two-day meeting next Wednesday. This will be followed by the crucial BoE meeting on Thursday, which will play a key role in providing a significant boost to the GBP/USD pair and determining the next leg of a directional move.
BoE FAQs
The Bank of England (BoE) decides the monetary policy of the United Kingdom. Its main objective is to achieve price stability, i.e. a constant inflation rate of 2%. Its instrument for achieving this is the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and at which banks lend to each other, determining the level of interest rates in the wider economy. This also influences the value of the British Pound (GBP).
When inflation exceeds the Bank of England’s target, the Bank of England responds by raising interest rates, making it more expensive for citizens and businesses to access credit. This is positive for the British Pound, as higher interest rates make the UK a more attractive place for global investors to invest their money. When inflation falls below target, it is a sign that economic growth is slowing, and the Bank of England will consider lowering interest rates to make credit cheaper in the hope that businesses will borrow to invest in growth-generating projects, which is negative for the British Pound.
In extreme situations, the Bank of England may implement a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit into a jammed financial system. QE is a policy of last resort when lowering interest rates fails to achieve the required result. The process of QE involves the Bank of England printing money to buy assets, usually AAA-rated government or corporate bonds, from banks and other financial institutions. QE often results in a weakening of the British Pound.
Quantitative tightening (QT) is the reverse of QE, and is applied when the economy is strengthening and inflation is starting to rise. Whereas in QE the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage them to lend, in QT the BoE stops buying more bonds and stops reinvesting the maturing principal of bonds it already holds. This is generally positive for the British Pound.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
