GBP/USD remains below 1.2800 ahead of second testimony by Fed’s Powell
- GBP/USD struggles as the US Dollar improves due to the cautious stance of Fed Chair Powell.
- Fed Chair Powell stated, "First-quarter data did not support the greater confidence in the inflation path."
- BoE policymaker Jonathan Haskel stressed maintaining steady interest rates until there is greater certainty that inflationary pressures have subsided.
GBP/USD remains tepid for the second consecutive day, trading around 1.2780 during the Asian session on Wednesday. The decline of the GBP/USD pair can be attributed to the strengthening US Dollar (USD), which has gained momentum following Federal Reserve Chairman Jerome Powell's testimony before the US Congress on Tuesday. Powell acknowledged improving inflation data but reiterated the Fed's cautious stance.
Fed Chair Jerome Powell stated, "More good data would strengthen our confidence in inflation." Powell emphasized that a "policy rate cut is inappropriate until the Fed gains greater confidence that inflation is headed sustainably toward 2%." He also noted that "first-quarter data did not support the greater confidence in the inflation path that the Fed needs to cut rates."
Traders anticipate the second semi-annual testimony by Fed Chair Jerome Powell and speeches by the Fed’s Michelle Bowman and Austan Goolsbee on Wednesday. Additionally, attention will be on the US Consumer Price Index (CPI) data, set to be released on Thursday.
In the United Kingdom (UK), Bank of England (BoE) policymaker Jonathan Haskel has recommended maintaining current interest rates due to persistent price pressures in the job market. Haskel emphasized, "I prefer to keep rates steady until we see more assurance that underlying inflationary pressures have truly diminished," according to Reuters.
The Pound Sterling (GBP) has shown subdued movement against major currencies as attention turns toward upcoming economic indicators. Specifically, investors are anticipating the release of the UK's monthly Gross Domestic Product (GDP) and May's factory data, scheduled for publication on Thursday.
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.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
