- GBP/USD trims losses around 1.2840 in early Asian trading on Wednesday.
- The Fed is expected to keep interest rates unchanged at its July policy meeting on Wednesday.
- GBP weakens on speculation that BoE will start cutting rates from August meeting.
The GBP/USD pair remains on the defensive near 1.2840 during early Asian trading hours on Wednesday. Markets could turn cautious ahead of the Federal Reserve (Fed) interest rate decision on Wednesday, followed by the Bank of England (BoE) policy meeting on Thursday.
The Fed is expected to keep interest rates unchanged at its July policy meeting on Wednesday. The U.S. central bank has kept its benchmark funds rate in a range of 5.25%-5.50% since July 2023, marking the longest period of tight monetary policy in decades.
Market participants will be looking to Chairman Jerome Powell’s comments for further clues on the future path of policy rates. Markets expect the Fed to begin easing policy as early as September as inflation has approached the Fed’s 2% target.
Data released on Tuesday showed that US JOLTS job openings declined to 8.184 million in June, compared with May’s revised figure of 8.23 ​​million, above the market expectation of 8.03 million. Meanwhile, US consumer confidence rose to 100.3 in July from June’s revised figure of 97.8. This figure was above the market consensus of 99.7, according to the Conference Board.
As for GBP, investors continued to price in a potential rate cut by the BoE on Thursday, dragging the British Pound (GBP) lower against the USD. Trades see a nearly 58% chance that the BoE will cut its borrowing costs by 25 basis points (bps) to 5%, Reuters reported.
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.
