- GBP/USD struggles as US Dollar improves on Fed Chair Powell’s cautious stance.
- Fed Chairman Powell said: “First-quarter data did not support increased confidence in the path of inflation.”
- BoE policymaker Jonathan Haskel insisted on keeping interest rates steady until there was greater certainty that inflationary pressures had eased.
GBP/USD remains tepid for the second consecutive day, trading around 1.2780 during the Asian session on Wednesday. The GBP/USD pair’s decline can be attributed to the strengthening of the US Dollar (USD), which has gained momentum following Federal Reserve Chair Jerome Powell’s testimony before the US Congress on Tuesday. Powell acknowledged the improvement in inflation data but reiterated the Fed’s cautious stance.
Fed Chair Jerome Powell stated, “More good data would strengthen our confidence in inflation.” Powell emphasized that a “policy rate cut is inappropriate until the Fed gains greater confidence that inflation is sustainably headed toward 2%.” He also noted that “first quarter data did not support the increased confidence in the path of inflation that the Fed needs to cut rates.”
Traders are looking ahead to Fed Chair Jerome Powell’s second semi-annual testimony and speeches by Fed Chair Michelle Bowman and Austan Goolsbee on Wednesday. In addition, attention will be focused on U.S. Consumer Price Index (CPI) data, due on Thursday.
In the UK, Bank of England (BoE) policymaker Jonathan Haskel has recommended holding current interest rates due to persistent price pressures in the labour market. Haskel stressed: “I prefer to keep rates steady until we see more assurance that underlying inflation pressures have actually eased,” according to Reuters.
The British Pound (GBP) has shown a moderate move against the major currencies as attention turns to upcoming economic indicators. Specifically, investors are anticipating the release of the UK’s monthly Gross Domestic Product (GDP) and May factory data, scheduled for release on Thursday.
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.
