GBP/USD rises as UK inflation supports BoE hold, Fed cut in focus
- GBP/USD climbs as UK inflation holds at 3.8% YoY, with core CPI declining to 3.6%.
- Fed expected to cut 25 bps to 4.00%–4.25%, though dissent possible as Miran pushes 50 bps.
- US Housing Starts plunge 8.5% to the lowest since May.
The British Pound (GBP) advances modestly 0.15% against the US Dollar (USD) on Wednesday as traders await the outcome of the Federal Reserve’s (Fed) monetary policy decision. Nevertheless, Sterling climbs as inflation data in the UK justifies the forecasts of the Bank of England (BoE) holding rates on Thursday. GBP/USD trades at 1.3661 after bouncing off daily lows of 1.3629.
Pound gains 0.15% as traders eye Fed’s 25 bps cut and dot plot guidance
Later on the day, the Fed is expected to reduce rates by 25 basis points (bps) to the 4.00%-4.25% range. The decision is not expected to be unanimous, as US President Donald Trump’s appointee Stephen Miran could push for a 50-basis-point cut.
TD Securities, on a note, said that Fed Chair Jerome Powell “is unlikely to commit to the future path of rate cuts,” which means that subsequent meetings would be live, keeping the Fed options open in the event of a reacceleration of inflation.
Market participants will also review the updated Summary of Economic Projections (SEP) and the dot plot for insight into the future of interest rate's path.
Earlier, US Housing Starts in August fell, hitting its lowest level since May. Starts plunged 8.5% MoM after an increase of 3.4% in July, dropping from 1.429 million to 1.307 million. Building Permits also decreased by 3.7%.
Across the pond, August’s inflation in the UK came in line with estimates at 3.8% YoY. Core CPI cooled from 3.8% to 3.6% YoY, and both reported readings were aligned with the BoE’s latest projections. This data cemented the case for the BoE to hold rates unchanged at 4% on Thursday. Nevertheless, a Reuters poll revealed that economists expect at least one more reduction in 2025.
Fed interest rates probability tool
Source: Prime Market Terminal
GBP/USD Price Forecast: Technical outlook
The GBP/USD technical picture remains bullish, though traders will face key resistance at 1.3681, the July 4 peak. A breach of the latter will expose the 1.3700 figure, ahead of challenging the yearly peak at 1.3788. Overhead lies 1.3800.
Conversely, if GBP/USD drops below 1.3650, sellers could drive prices towards 1.3600 and test the September 16 low at 1.3596. On further weakness, the 20-day SMA could be tested at 1.3516.
(This story was corrected on September 17 at 16:23 to say that US Housing Starts in July increased 3.4%, not 5.2%.)
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
Christian Borjon Valencia
FXStreet
Christian Borjon began his career as a retail trader in 2010, mainly focused on technical analysis and strategies around it. He started as a swing trader, as he used to work in another industry unrelated to the financial markets.
