Pound Sterling struggles to lure buyers amid UK political drama, BoE easing bias

GBP/USD bulls remain on the sidelines amid the UK political doubts and BoE easing expectations.
Reduced bets for more Fed rate cuts lend support to the USD and contribute to capping the pair.
Traders look to comments from BoE’s Pill for some impetus ahead of the US PPI later this Friday.

Haresh Menghani FXStreet

The GBP/USD pair struggles to build on the overnight modest bounce from the 1.3445 area, or the weekly low, and oscillates in a narrow band during the Asian session on Friday. Spot prices currently trade just below the 1.3500 psychological mark, nearly unchanged for the day, and seem vulnerable to slide further.

The Gorton and Denton by-election, held on February 26, has become a focal point of political drama in the UK amid allegations of illegal voting and a tight contest between Labour, Reform UK, and the Green Party candidates. This, along with the Bank of England (BoE) easing expectations, acts as a headwind for the British Pound (GBP) and the GBP/USD pair.

During his testimony before the Parliament’s Treasury Committee earlier this week, BoE Governor Andrew Bailey signaled that there is scope for rate cuts amid the expectation that inflation will return to the 2% target. This marks a significant divergence in comparison to reduced bets for more rate cuts by the US Federal Reserve (Fed) and caps the GBP/USD pair.

Traders trimmed their bets for aggressive policy easing by the US central bank after minutes from the January FOMC meeting showed that the Fed is in no hurry to cut interest rates further. Moreover, officials discussed the possibility of raising rates if inflation does not cool. This keeps the US Dollar (USD) close to the monthly high and favors the GBP/USD bears.

Moving ahead, there isn't any relevant market-moving economic data due for release from the UK on Friday, though comments from BoE's Chief Economist Huw Pill could influence the GBP. Later during the North American session, traders will take cues from the US Producer Price Index (PPI), which would drive the USD and provide some impetus to the GBP/USD pair.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

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).

How does the Bank of England’s monetary policy influence Sterling?

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.

What is Quantitative Easing (QE) and how does it affect the Pound?

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.

What is Quantitative tightening (QT) and how does it affect the 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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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