It has been a quiet week for the British pound, but that could change in a hurry, with the Fed announcing its rate decision later today, followed by the Bank of England on Thursday.
Markets eye Fed decision
It’s a virtual guarantee that the Federal Reserve will raise rates at today’s meeting by 25 basis points. This would bring the benchmark rate to 4.75%. The Fed has had some success bringing down inflation, which fell to 6.5% in December. Inflation has de-accelerated for six straight months, which certainly sounds like it has peaked. Still, the Fed won’t be using the “P” word anytime soon for fear of an excessive reaction from the markets. The markets are counting on a dovish pivot from the Fed, given the increasing signs that the US economy is slowing down. Will the Fed stick to its hawkish stance at the meeting, or will it present a more dovish stance? If the Fed signals that there are no plans to pivot, the US dollar should gain ground. Conversely, any hints about an easing in policy, such as a cut in rates later this year, would raise risk appetite and weigh on the dollar.
The Bank of England follows the Fed with its own rate announcement on Thursday. The central bank is widely expected to raise rates by 50 basis points, which would bring the cash rate to 4.0% and would mark a 10th straight rate increase. Given the weak economy and sharp drop in housing prices, there is an outside chance of a modest 25-basis point hike. Despite the steep tightening cycle, inflation is running at a sky-high 10.5%, so the BoE is in no position to talk about a pause in rate hikes without inflation heading lower. Wage growth is becoming a major concern for the BoE, and today’s massive strike by public servants for better pay won’t help matters. Wages haven’t kept up with soaring inflation, which is why we’re seeing disgruntled workers go on strike, but wage growth is close to a record pace and is a major factor behind inflation which is still in double digits.
- GBP/USD is putting pressure on support at 1.2289. Next, there is support at 1.2203
- There is resistance at 1.2369 and 1.2474
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- Source: https://www.marketpulse.com/20230201/pound-in-holding-pattern-ahead-of-fed-boe/