The British pound has recently hit new multi-year highs, briefly surpassing the 1.33 USD mark before experiencing a slight pullback following the Bank of England’s decision to keep interest rates unchanged. This bullish movement in the GBP/USD pair comes amidst diverging monetary policies between the Bank of England (BoE) and the United States Federal Reserve (Fed), leading to increased volatility in the currency market.
Divergence in Monetary Policies:
The Federal Reserve initiated its normalization process by cutting rates by 50 basis points, marking its first easing in four years and bringing its reference rate to lower levels since 2001. Despite this aggressive move, Fed Chairman Jerome Powell emphasized that there is no rush to further ease monetary policy and that half-point rate cuts will not become the new standard pace. On the other hand, the Bank of England decided to maintain the interest rate at 5% during its September 2024 meeting, following a 25 basis point cut in August, the first in over four years. While this decision aligns with market expectations, one member of the Monetary Policy Committee advocated for an additional 25 basis point reduction to 4.75%. The BoE highlighted the importance of a gradual approach to reducing monetary policy restrictions.
Impact on Currency Markets:
The divergence in actions between these two major central banks has significantly influenced the behavior of the GBP/USD pair in recent sessions. The relatively higher interest rate in the UK compared to the US has favored the pound against the dollar. Market participants now anticipate around 42 basis points of rate cuts by the BoE before the year-end, down from the previous expectation of 52 basis points. Meanwhile, the Fed has hinted at the possibility of further rate cuts this year and next, weakening the US dollar and benefiting the pound.
Key Economic Data:
In the UK, the annual inflation rate remained steady at 2.2% in August, in line with market projections. Inflation is expected to rise to around 2.5% by the end of the year, driven by the diminishing impact of last year’s energy price declines. Consumer price inflation in the services sector stayed elevated at 5.6% in August, indicating persistent inflationary pressures. Average weekly wage growth in the private sector declined to 4.9% in the three months to July, while GDP growth is forecasted to return to approximately 0.3% per quarter in the second half of the year.
Monetary Policy Decisions:
The BoE’s Monetary Policy Committee unanimously agreed to reduce its UK government bond holdings by £100 billion over the next 12 months, bringing the total to £558 billion. This measure is part of the bank’s strategy to normalize monetary conditions and reduce the stimulus provided in previous years.
Outlook and Considerations:
Both the Fed and the BoE continue to advocate for a gradual approach in implementing their monetary policies, reflecting a cautious assessment of global and domestic economic conditions. Fed Chairman Jerome Powell emphasized the need for careful policy adjustments, stating that aggressive cuts will not be the norm. Similarly, the BoE stressed the importance of a gradual approach to easing monetary restrictions to balance economic growth support and inflation control.
Technical Analysis:
The GBP/USD pair has shown signs of upward pressure, with a breakout above the key level of 1.2900 after a period of consolidation in a symmetrical triangle pattern. This breakout suggests that the bearish trend since the 2021 high may have ended, with a sustained rebound from late 2022 lows. A 76.40% Fibonacci retracement extension sets the next target at 1.33314, a level that could lead to further recovery if broken. In case of a correction, the 1.2900 level may act as significant support. Investors should await further confirmations before anticipating a move towards higher targets.
In conclusion, the British pound’s recent surge to multi-year highs against the US dollar reflects the diverging monetary policies of the Bank of England and the Federal Reserve. While the currency market experiences increased volatility, the cautious approach taken by both central banks indicates a careful assessment of economic conditions. Investors should monitor key economic data and technical analysis indicators to make informed decisions in the evolving currency landscape.
