GBP/USD steadies near 1.2800 as traders expect BoE to maintain current interest rates
- GBP/USD maintains its position as the BoE is widely expected to keep rates unchanged in December.
- UK headline inflation has risen again after briefly dipping below the BoE’s 2% target.
- Traders adopt caution ahead of US Consumer Price Index data scheduled to be released on Wednesday.
GBP/USD extends its winning streak for the third successive session, trading around 1.2780 during the Asian hours on Wednesday. The Pound Sterling (GBP) gains support against its major peers as traders become increasingly confident that the Bank of England (BoE) will keep its interest rates unchanged at 4.75% in December’s monetary policy decision.
Most BoE officials are expected to vote to keep interest rates unchanged, as UK headline inflation has risen again after briefly dipping below the bank's 2% target. The central bank had earlier predicted a rebound in inflation following its temporary alignment with the target range.
Traders are likely to focus on the UK’s October monthly Gross Domestic Product (GDP) and Industrial and Manufacturing Production data. Economists anticipate growth in factory output and GDP following declines in September.
The upside of the GBP/USD pair could be restrained as the US Dollar (USD) receives support from market caution, which could be attributed to the upcoming US Consumer Price Index (CPI) data release due on Wednesday. The US CPI inflation is estimated to rise to 2.7% YoY in November from 2.6% in October. Meanwhile, the core CPI, excluding Food & Energy, is expected to increase 3.3% YoY.
Any indications of stalled progress could significantly diminish the likelihood of a Federal Reserve’s (Fed) rate cut. However, markets are now pricing in nearly an 85.8% chance of Fed rate reductions by 25 basis points, according to the CME FedWatch Tool.
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.
