British Pound declines as Fed hawkish rate holds boost US Dollar, BoE rate decision looms
- GBP/USD softens to around 1.3345 in Thursday’s early European session.
- Fed holds rates steady; three policymakers dissent in favor of a hike.
- The BoE is likely to keep rates on hold at 3.75%, its level since December.
The GBP/USD pair attracts some sellers to near 1.3345 during the early European trading hours on Thursday. The US Dollar (USD) edges higher against the British Pound (GBP) amid hawkish Federal Reserve (Fed) signals and escalating Middle East tensions. The Bank of England (BoE) interest rate decision will take center stage later on Thursday.
As widely expected, the Fed left the Federal Funds Rate in its current target range between 3.50% and 3.75% at its July policy meeting on Wednesday. However, the statement showed that three committee members voted for a 25-basis-point rate hike at this meeting. During the press conference, Fed Chairman Kevin Warsh said that tightening in the market has done quite a bit of work for policymakers. He added that the committee will be quick to act if inflation pressures accelerate.
Renewed Middle East hostilities could boost a safe-haven currency such as the Greenback against the GBP. US President Donald Trump said on Wednesday that Washington would strike back at Iran after a recent attack that targeted a military base in Jordan.
The US military began launching strikes against Iran late Wednesday, retaliating against Iranian missile attacks on American forces in the region, per the Guardian. Iranian media said the US military hit the south-western Iranian city of Abadan as well as Qeshm Island.
The BoE is expected to keep the interest rates steady at 3.75% on Thursday as it weighs the impact of the US-Iran war that has closed the Strait of Hormuz for the past five months and intensified inflation pressures.
BoE Governor Andrew Bailey said the central bank's signal back in March that previously expected cuts to borrowing costs were off the table due to the war is likely to keep inflation in check. Rate futures markets on Wednesday pointed to a quarter-point hike by November and another one by March 2027, according to Reuters.
Pound under pressure as Societe Generale flags downside risks for GBP/USD
Analysts at Societe Generale observe that cable has been "steady near 1.33" but retains a "lower bias on oil," with the bank warning that a "hawkish Fed rate decision could hasten return to below 1.32 and late June low." The commentary underscores lingering downside risks for GBP/USD as markets look ahead to upcoming central bank events.
BoE FAQs
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).
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.
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.
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.
Artigos Recomendados
