British Pound retreats further, US Dollar picks up with the Fed in the spotlight

• GBP/USD dips below 1.3350, from last week's highs near 1.3420.
• The US Dollar ticks up in calm markets as traders trim USD short positions heading into the Fed's decision.
• The BoE is widely expected to hike rates in early November, which is likely to limit Pound dips.
  

The British Pound (GBP) extends its reversal from the five-week highs reached against the US Dollar (USD) last week, as investors trim USD short positions ahead of the Federal Reserve’s (Fed) monetary policy meeting, due on Wednesday. The GBP/USD pair hits session lows just below 1.3350, on Monday about 0.5% below last week’s peak, at 1.3419.

Market volatility remains at relatively low levels, as traders bide their time ahead of monetary policy decisions by the Fed and other central banks later this week, with the US Dollar showing a somewhat firmer stance than in the previous weeks.

Fed - BoE immediate monetary policy divergence is Pound-supportive

The US central bank is widely expected to leave its monetary policy unchanged on Wednesday. Fed policymakers have been requesting some more time to assess the impact of September’s rate hike before tightening monetary policy further, which has prompted investors to ditch hopes of back-to-back interest rate hikes.

Bets of a December hike, however, remain high with futures markets pricing in 80% odds for at least a quarter-point rate hike. Against this background, traders are likely to be very attentive to September’s Personal Consumption Expenditures (PCE) Price Index figures, due on Thursday, to confirm those hopes.

The Bank of England (BoE) will meet next week and markets are nearly fully pricing a 25-basis-point rate hike. Recent macroeconomic data, especially the unexpected Gross Domestic Product (GDP) growth and the overshot September Consumer Price Index (CPI), provide the ideal conditions for some monetary tightening, which is likely to keep Pound reversals limited.

Analysts at Societe Generale note that GBP/USD is “off five-week highs but up 0.5% this week after 0.7% last week, atypical path pre-budget, while observing that a “BoE rate increase [is] nailed on in November,”

“The brace of upside surprises for CPI and PPI output price inflation, and firmer wage data (...) will alert the MPC to the budding risk of second-round effects and will almost certainly trigger a hawkish response on interest rates the next meeting in two weeks.” says the bank in a note.