British Pound treads water above 1.3450 with markets awaiting US employment figures
- GBP/USD consolidates above 1.3450, with recent price action showing a lack of clear bias.
- The Pound drew some support from upbeat UK services activity data on Wednesday.
- In the US, dwindling hopes of a Fed rate hike in September are keeping the USD on the defensive.
The British Pound (GBP) holds marginal losses against the US Dollar (USD) on Thursday, trading at 1.3460 at the time of writing, down from Wednesday's highs at 1.3486. This leaves the GBP/USD pair hovering within a 100-pip range, with bulls capped below 1.3500 while a weak US Dollar keeps downside attempts supported above the 1.3400 area.
The Sterling drew some support on Wednesday from an upward revision of July’s S&P Global Services PMI figures and another downbeat employment reading in the US, which cast doubts about Friday’s Nonfarm Payrolls report and cooled hopes of Federal Reserve rate hikes further.
Strategists at Scotiabank describe the Pound’s tone as “neutral/bullish,” highlighting a “solid rise in Cable last week and bullish leaning (but still weak) trend oscillators suggesting some upside potential for the Pound, however.” In their view, “gains through the low 1.35 zone should allow spot to retest the recent peak around 1.3555/60,” while “support is 1.3390/00.”
US Dollar struggles amid fading Fed tightening bets
The US Dollar, on the other side, remains on its back foot amid lower US Treasury yields. Recent macroeconomic releases have not been particularly supportive of further monetary tightening, and have prompted traders to dial down bets of a September rate hike to 54% from 67% earlier this week.
Beyond that, Analysts at MUFG suggest that doubts over Fed independence are putting additional pressure on the USD, and cite a Wall Street Journal report highlighting "repeated" meetings between President Donald Trump and Fed Chair Kevin Warsh since he took over at the Fed. WSJ points to “bursts” of calls “several times in a stretch of days,” a pattern that “will only reinforce the impression of greater political influence undermining Fed independence.”
MUFG also warns that “concerns that emanate from Washington over financial market developments will hardly instil confidence in global investors in holding US assets and could herald another spell of increased US dollar hedging like January this year, which would be bad news for the dollar.”
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger 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 may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining 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 named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck 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 in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually 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 principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
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