- We are still seeing some incredibly quiet trading conditions in the GBP/USD exchange rate, with six consecutive weeks of closes above 1.2695 and below 1.2750.
- Recently, the pound-dollar is stable around 1.2715 at the time of writing.
- Moreover, the recent ease in the pound sterling could be challenged this week as both the US Federal Reserve and the Bank of England deliver their latest policy decisions and guidance updates.
- Therefore, both will be keen to reaffirm their belief that it is too early to discuss interest rate cuts while at the same time hinting that the time for such discussions is drawing closer.
Meanwhile, if the message is delivered as desired, the pound sterling could look forward to more limited volatility. Ultimately, we need only look at the Bank of England event on Thursday to remind us that central bank governors are walking a fine line when they try to guide markets, and that any slip-up could lead to some good volatility in the forex market.
What to Expect for the Pound with the Bank of England Event?
In this regard, Dominic Banning, head of forex research at HSBC, said that the Bank of England will likely reveal significant downward revisions to inflation expectations for 2024 this week. Combined with a much less tight vote split than in December, this could open the door for the market to price in a greater likelihood of BoE cuts by May.”
The analyst points to last week's ECB policy update and subsequent euro weakness as providing a potential model for the Bank of England and the British pound. The analyst added, “In the same way that the European Central Bank’s dovish rhetoric affected the euro, we expect the pound sterling to be exposed to pressure from the Bank of England’s tendency towards an accommodative bias.”
Last week saw the ECB keep its policy settings and guidance unchanged, but ECB President Lagarde's press conference sent a strong hint to markets that an interest rate cut in April is possible. Accordingly, UBS analyst Patrick Ennerst says that the price of the pound may decline if the market converges on the belief that the Bank of England will cut interest rates in May. He added, “We expect a first order cut in May, which should limit the rise in GBP/USD. Overall, we believe that GBP/USD risks are slightly to the downside from current spot levels in the short term, and we prefer to sell.” Also, there are upside exposure between 1.28 and 1.30.
On another level, it affects the sterling dollar. The US Federal Reserve will issue its final policy decision tomorrow, Wednesday, as analysts expect Chairman Jerome Powell to resist a frank discussion of interest rate cuts. Commenting on the event, Antti Ilvonen, an analyst at Danske Bank, said: “The US Federal Reserve is in a comfortable position regarding both aspects of its dual mandate. Added, “Calming inflation requires lowering interest rates toward neutral, but strong growth and labor markets allow the Fed to move gradually.”
However, he warns that the recent decline in US bond yields, due to expectations of generous US interest rate cuts in 2024, leaves the market vulnerable to a reaction from Powell. This is because increased bets on lower interest rates are reflected in lower bond yields, which in turn affects lending interest rates. Thus, the forecasts have real-world consequences that conflict with the US Federal Reserve's desire to ease policy too early. Expect a stronger dollar if Powell opposes the market's idea of rapid interest rate cuts, as we expect.
GBPUSD Expectations and Analysis Today:
There is no change in our technical view of the performance of the price of the GBP/USD pair. The performance on the daily chart is neutral with an upward bias, and the resistance 1.2775 will remain a confirmation of bulls’ control and portends a strong upward movement to come in the event that central bank policy decisions and US job numbers stop the dollar’s gains. Therefore, the next peak may be 1.2850 and then 1.3000, respectively. Obviously, among them is the best sale without risk. On the other hand, over the same time period, the support level of 1.2600 will remain the most important for starting to break the general upward trend.
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