British Pound picks up nearing 1.3200 with all eyes on US PCE Price Index data
- GBP/USD bounces up from seven-month lows at 1.3140 to reach session highs a few pips shy of 1.3200.
- The pair remains on its back foot, weighed down by Fed-BoE monetary policy divergence.
- The uncertain political scenario in the UK puts additional weight on the Sterling.
The British Pound (GBP) shows mild gains against the US Dollar (USD) on Thursday, as investors trim their USD long positions ahead of the release of the US Personal Consumption Expenditures (PCE) Price Index later in the day. The pair has bounced from seven-month lows at 1.3140 but remains below 1.3200 so far, practically flat on weekly charts.
The pair has dropped more than 1.6% over the last 10 days, weighed down by unfavourable monetary policy divergence. Recent data have boosted confidence in the momentum of the US economy, prompting Federal Reserve (Fed) officials to adopt more hawkish rhetoric, while comments from Bank of England (BoE) officials hint at steady interest rates at least until well into 2027.
US PCE Price Index data, due later on Thursday, is likely to endorse that view. The Fed’s inflation gauge of choice is expected to show that price pressures accelerated to a 4.1% yearly pace in May, the fastest growth in the last three years, up from 3.8% in April. Likewise, core inflation is seen ticking up to a 3.4% yearly rate in May, from 3.3% in April.
In the UK, the uncertain political scenario is failing to support the Pound. The resignation of Prime Minister Keir Starmer, announced earlier this week, triggered an immediate positive reaction in the Pound, but investors remain wary of placing large GBP long bets, awaiting more clarity about the profile and the policies of the next PM, with particular interest in all things related to government borrowing plans.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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