- GBP/USD hits highest 30-month price following Fed rate cut.
- The BoE's interest rate forecasts are due to be released on Thursday but no changes are expected.
- UK retail sales are due to close the week on Friday.
GBP/USD rose to a 30-month high on Wednesday, approaching 1.3300, after the US Federal Reserve cut interest rates by 50 basis points, the first interest rate cut in four years. The Bank of England (BoE) is due to announce interest rates for September early on Thursday, but no changes are expected after the BoE cut its benchmark interest rate this summer.
Forex Today: Investor attention shifts to the health of the US economy
The Bank of England is expected to leave interest rates unchanged at 5.0% by a vote of 7 to 2. The Bank of England's Monetary Policy Committee (MPC) previously cut interest rates by 25 basis points from 5.25% by a vote of 5 to 4, and markets are expecting the Bank of England to keep rates on hold at this meeting.
The dot plot in the Federal Open Market Committee's (FOMC) Economic Outlook Summary also revised downward from the central bank's previous interest rate outlook. The median Fed policy forecast calls for the federal funds rate to be 4.4% by the end of 2024 and 3.4% by the end of 2025, down from 5.1% and 4.1%, respectively.
Digging into the Fed report, Fed policymakers now expect U.S. gross domestic product (GDP) growth to plateau at 2.0% through 2024, down from 2.1% last reported in June. Fed officials also expect the U.S. unemployment rate to stabilize at around 4.4% by the end of 2024.
Fed Chairman Jerome Powell did his best to calm the market during his press conference after the Fed's massive 50 basis point rate cut, emphasizing that the Fed will resume a wait-and-see approach to economic data in the coming weeks before deciding on further rate cuts. The Fed Chairman's cautious stance in explaining the Fed's policy adjustments has balanced the market, with interest rate markets pricing in a 65% chance that no further action will be taken at the FOMC's next rate decision on November 7th.
GBP/USD Price Prediction
Despite rising to a 30-month high near 1.3300 on Wednesday, the market quickly contained the day's volatility, keeping GBP/USD at familiar levels near 1.3200. The daily candlestick still prices in a solid bullish trend, with GBP/USD holding above the 50-day exponential moving average (EMA) near 1.3000.
GBP/USD daily chart
Frequently asked questions about the British pound
The Pound Sterling (GBP) is the world's oldest currency (886) and the official currency of the United Kingdom. According to 2022 data, it is the fourth most traded currency in the world by foreign exchange (FX) volume, accounting for 12% of all transactions, reaching an average of $630 billion per day. The main trading pairs are GBP/USD (also known as “Cable”), which accounts for 11% of FX, GBP/JPY (3%), known among traders as the “Dragon”, and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The most important factor affecting the value of the British pound is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on whether it has achieved its primary goal of “price stability” – a stable inflation rate of around 2%. Its main tool for achieving this is by adjusting interest rates. If inflation is too high, the Bank of England will try to contain it by raising interest rates, making it more expensive for individuals and businesses to obtain loans. Higher interest rates are generally a positive for the British pound, as they make the UK a more attractive place for investors around the world to park their funds. If inflation is too low, it is a sign that economic growth is slowing. In this scenario, the Bank of England would consider lowering interest rates to make credit cheaper and encourage businesses to borrow more to invest in projects that generate growth.
Data released measures the health of the economy and can affect the value of the British pound. Indicators such as GDP, manufacturing and services PMI, and employment can all influence the direction of the British pound. A strong economy is good for the British pound. Not only will it attract more foreign investment, but it may also encourage the Bank of England to raise interest rates, which will directly strengthen the British pound. On the other hand, weak economic data can cause the British pound to fall.
Another important piece of data about the British pound is its trade balance. This indicator measures the difference between the income a country makes from exports and the amount it spends on imports over a given period of time. If a country produces exports that are in high demand, its currency will only benefit from the additional demand created by foreign buyers looking to purchase these goods. So, if the trade balance is positive, the currency will be stronger and vice versa if it is negative.
