British Pound languishes below 1.3300 heading into Fed and BoE decisions

GBP/USD holds losses below 1.3300 on track after depreciating about 1.20% in less than two weeks.
Fed-BoE monetary policy divergence is posing a heavy weight on the Sterling.
Doubts about financing for Burnham's welfare reform are adding pressure on the Pound.

Guillermo Alcala FXStreet

The British Pound (GBP) has given away previous gains against the US Dollar (USD) on Wednesday and remains practically flat in the daily chart, trading below 1.3300 and on track to complete a nearly 1.20% decline over the last two weeks. Growing concerns about UK PM Burnham’s welfare reforms and an adverse monetary policy divergence between the Federal Reserve (Fed) and the Bank of England (BoE) are hammering the Pound ahead of key monetary policy decisions.

In a few hours, the Fed will likely stand pat on rates, although markets foresee a one-in-three chance of a quarter-point hike. A surprise rate hike would probably send the US Dollar rallying across the board, but the most likely outcome, a pause keeping the door open for a hike in September, will still highlight a more hawkish stance than the BoE and underpin the pair’s bearish bias.

Sterling faces downside risk as BoE expected to stay on hold

On Thursday, the BoE is widely expected to leave interest rates unchanged, and the focus will be on the number of hawkish dissenters among the committee. In June’s meeting, two officials were calling for a rate hike, and the Pound would need some more hawkish voices to question market expectations of a prolonged rate pause.

Analysts at ING flag Thursday's Bank of England meeting as “the main event,” arguing that “if inflation is still expected to remain contained, we believe the BoE will leave rates unchanged for the rest of the year,” implying a steady policy stance despite lingering market expectations. With “markets pricing 38 [bps] of tightening by year-end,” the bank warns that “dovish repricing remains, in our view, the clearest near-term risk for sterling.”

Beyond that, Prime Minister Andy Burnham's pledges to reduce the cost of living for UK citizens have resurfaced concerns about fiscal stability, increasing bearish pressure on the GBP. Burnham announced cuts to electricity bills and other measures like transport caps while promising that he will not raise taxes on working people. These plans have left investors wondering where the financing will come from, as the memories of the 2022 debt crisis remain fresh in everyone's mind.

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).

Economic Indicator

BoE Interest Rate Decision

The Bank of England (BoE) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoE is hawkish about the inflationary outlook of the economy and raises interest rates it is usually bullish for the Pound Sterling (GBP). Likewise, if the BoE adopts a dovish view on the UK economy and keeps interest rates unchanged, or cuts them, it is seen as bearish for GBP.

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