- GBP/USD consolidates Wednesday’s softer UK CPI-inspired drop to a more than two-month low.
- Bets on a BoE rate cut in November weigh on the Pound and the pair amid a bullish USD.
- Hopes for less hawkish Fed policy favor USD bulls ahead of US data
The GBP/USD pair remains below the psychological mark of 1.3000 during the Asian session on Thursday and is currently close to its lowest level since August 20, touched the previous day. Meanwhile, the fundamental backdrop appears to lean firmly in favor of the bears and suggests that the path of least resistance for spot prices is to the downside.
Data released on Wednesday showed the UK’s annual Consumer Price Index (CPI) slowed from 2.2% in August to 1.7% last month, marking the lowest reading since April 2021. The data Bets increased on an interest rate cut by the Bank of England (BoE) in November, which continues to weaken the British Pound (GBP). Apart from this, the recent rally of the US Dollar (USD), to the highest level since early August, validates the negative short-term outlook for the GBP/USD pair.
Investors now appear convinced that the Federal Reserve (Fed) will proceed with modest interest rate cuts over the next year. This keeps the 10-year US government bond yield above the 4% threshold and continues to support the USD. Aside from this, lingering geopolitical risks arising from the ongoing conflicts in the Middle East benefit the relative safe haven status of the Dollar and support the prospects of a further depreciation move for the GBP/USD pair.
Even from a technical perspective, the overnight break below a one-week trading range and acceptance below the 1.3000 psychological mark add credibility to the bearish setup. Therefore, a follow-through weakness towards the 100-day SMA support near the 1.2955 region, en route towards the 1.2900 mark, looks like a distinct possibility. Traders now await US macroeconomic releases for fresh impetus later during the early North American session.
Thursday’s US economic docket includes the monthly retail sales report, the usual weekly initial jobless claims, the Philadelphia Fed manufacturing index and industrial production data. This, along with US bond yields and geopolitical developments, will drive demand for USD and generate short-term trading opportunities around the GBP/USD pair.
The BoE FAQs
The Bank of England (BoE) decides the UK’s monetary policy. Its main objective is to achieve price stability, that is, a constant inflation rate of 2%. Its instrument to achieve this is the adjustment of basic loan 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, it responds by raising interest rates, which makes access to credit more expensive for citizens and companies. 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 companies will borrow to invest in projects that generate growth, which is negative for the Pound sterling.
In extreme situations, the Bank of England can apply a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit into a clogged financial system. QE is a policy of last resort when lowering interest rates does not achieve the necessary result. The process of QE involves the Bank of England printing money to buy assets, typically government bonds or AAA-rated corporate bonds, from banks and other financial institutions. QE usually 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 begins to rise. While 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 the bonds that you already own. It is usually 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.
