GBP/USD Forecast: Pound Sterling could weaken on BoE-Fed policy divergence
- GBP/USD trades below 1.3300 after closing in the red on Wednesday.
- The Bank of England is widely anticipated to cut the policy rate by 25 basis points.
- The US and the UK are expected to outline a trade agreement.
GBP/USD came under heavy bearish pressure in the late American session on Wednesday and lost more than 0.5% on the day, erasing a majority of its weekly gains in the process. The pair stays on the back foot early Thursday and trades below 1.3300.
British Pound PRICE This week
The table below shows the percentage change of British Pound (GBP) against listed major currencies this week. British Pound was the weakest against the Japanese Yen.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.35% | -0.13% | 0.06% | 0.49% | 0.57% | 0.38% | 0.03% | |
| EUR | -0.35% | -0.22% | -0.03% | 0.40% | 0.50% | 0.30% | -0.04% | |
| GBP | 0.13% | 0.22% | -0.06% | 0.62% | 0.71% | 0.51% | 0.17% | |
| JPY | -0.06% | 0.03% | 0.06% | 0.44% | 0.53% | 0.41% | 0.10% | |
| CAD | -0.49% | -0.40% | -0.62% | -0.44% | -0.20% | -0.11% | -0.45% | |
| AUD | -0.57% | -0.50% | -0.71% | -0.53% | 0.20% | -0.20% | -0.53% | |
| NZD | -0.38% | -0.30% | -0.51% | -0.41% | 0.11% | 0.20% | -0.35% | |
| CHF | -0.03% | 0.04% | -0.17% | -0.10% | 0.45% | 0.53% | 0.35% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).
The US Dollar (USD) gathered strength against its rivals midweek as the Federal Reserve (Fed) adopted a cautious tone on policy-easing after leaving the policy rate unchanged at 4.25%-4.5%.
In the policy statement, the Fed noted that the uncertainty surrounding the economic outlook has increased further. Fed Chairman Jerome Powell told reporters in the post-meeting press conference that near-term inflation expectations have moved up because of tariffs and reiterated that they need to wait before adjusting the policy. The CME FedWatch Tool's probability of a 25 basis points (bps) rate cut in June, which was at 55% on May 1, dropped to 20% after the Fed event.
The Bank of England (BoE) is expected to cut the policy rate by 25 bps to 4.25%. In case BoE Governor Andrew Bailey downplays heightened uncertainty surrounding the inflation outlook in the press conference and suggests that they will remain on track to ease the policy further, markets could see that as a sign of a diverging Fed-BoE policy and trigger a leg lower in GBP/USD. Conversely, the pair could gain traction if some policymakers vote in favor of a no change in policy rate and Bailey puts more emphasis on inflation rather than labor market conditions, or the growth outlook.
Later in the day, US President Donald Trump is scheduled to hold a press conference to announce a trade agreement with what he called a "big and highly respected country." An official at the UK government reportedly confirmed Trump will outline a trade deal between the US and the UK. This development is unlikely to trigger a big market reaction.
GBP/USD Technical Analysis
GBP/USD was last seen trading near 1.3270, where the Fibonacci 23.6% retracement of the latest uptrend is located. In case the pair drops below this level and starts using it as resistance, additional losses toward 1.3200 (static level, round level) and 1.3165 (Fibonacci 38.2% retracement) could be seen.
On the upside, 1.3320-1.3330 (20-period Simple Moving Average (SMA), 100-period SMA, 50-period SMA) aligns as first resistance before 1.3400 (static level, round level) and 1.3450 (static level).
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
