- GBP/USD starts the new week on a positive note amid the prevailing selling bias in the USD.
- Rising expectations of a 50bps Fed rate cut and market optimism weaken the Dollar.
- Bulls may refrain from placing aggressive bets ahead of key central bank event risks.
The GBP/USD pair is attracting some buying at lower levels on the first day of a new week amid relatively thin trading conditions due to 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 holding near a one-week high hit on Friday amid the prevailing selling bias in the US Dollar (USD).
The US Dollar Index (DXY), which tracks the greenback against a basket of six currencies, is languishing near the yearly low set in August amid expectations of more aggressive policy easing by the Federal Reserve (Fed). In fact, traders are pricing in a higher probability 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 was easing. This is keeping US Treasury yields depressed near the 2024 low and USD bulls on the defensive.
Apart from this, a generally positive risk tone further weakens the safe-haven status of the Dollar. The British Pound (GBP), on the other hand, benefits from expectations that the Bank of England (BoE) will ease policy less than the Fed over the next year. However, markets are still betting on more BoE rate cuts, especially after data released last week pointed to a slowdown in UK wage growth and flat GDP for the second consecutive month in July. This could restrain bulls from placing aggressive bets around the GBP/USD pair.
Investors may also prefer to stay on the sidelines ahead of key central bank event risks this week. The Fed is scheduled to announce its decision at the end of a two-day monetary policy meeting on Wednesday. This will be followed by the BoE meeting on Thursday, which will play a key role in influencing the next directional move of the GBP/USD pair. Nevertheless, the fundamental backdrop favours USD bears and supports prospects for an extension of the pair’s bounce from the psychological 1.3000 mark, or a multi-week low hit last Wednesday.
The Fed FAQs
Monetary policy in the United States is directed by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and to promote full employment. Its main tool for achieving these goals is to adjust interest rates. When prices rise too quickly and inflation exceeds the Fed’s 2% target, the Fed raises interest rates, increasing borrowing costs throughout the economy. This translates into a strengthening of the 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 weighs on the greenback.
The Federal Reserve (Fed) holds eight meetings a year, at which the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC consists of twelve Federal Reserve officials: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the eleven regional Reserve bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy called Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a jammed 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 high-quality bonds from financial institutions. QE typically 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 capital of maturing bonds in its portfolio to buy new bonds. It is usually positive for the value of the US dollar.
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.
