- GBP/USD consolidates Wednesday’s softer UK CPI-inspired fall to over a two-month low.
- Bets for a BoE rate cut in November weigh on the GBP and the major amid a bullish USD.
- Hopes for a less aggressive Fed policy easing favor the USD bulls ahead of the US data.
The GBP/USD pair remains below the 1.3000 psychological mark during the Asian session on Thursday and is currently placed near its lowest level since August 20 touched the previous day. Meanwhile, the fundamental backdrop seems tilted firmly in favor of bearish traders and suggests that the path of least resistance for spot prices is to the downside.
Data published on Wednesday showed that the annual UK Consumer Price Index (CPI) decelerated from 2.2% in August to 1.7% last month, marking the lowest reading since April 2021. The data lifted bets for an interest rate cut by the Bank of England (BoE) in November, which continues to undermine the British Pound (GBP). Apart from this, the recent US Dollar (USD) rally, to the highest level since early August, validates the near-term negative outlook for the GBP/USD pair.
Investors now seem convinced that the Federal Reserve (Fed) will proceed with modest interest rate cuts over the next year. This keeps the yield on the benchmark 10-year US government bond above the 4% threshold and continues to underpin the USD. Apart from this, persistent geopolitical risks stemming from the ongoing conflicts in the Middle East benefit the Greenback's relative safe-haven status and support prospects for a further depreciating move for the GBP/USD pair.
Even from a technical perspective, the overnight breakdown below a one-week-old trading range and acceptance below the 1.3000 psychological mark add credence to the bearish setup. Hence, some follow-through weakness towards the 100-day Simple Moving Average (SMA) support near the 1.2955 region, en route to the 1.2900 mark, looks like a distinct possibility. Traders now look forward to the US macro releases for some impetus later during the early North American session.
Thursday's US economic docket features monthly Retails Sales report, the usual Weekly Initial Jobless Claims, the Philly Fed Manufacturing Index and Industrial Production data. This, along with the US bond yields and geopolitical developments, will drive the USD demand and produce short-term trading opportunities around the GBP/USD pair.
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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