Central banks action or non-action is the central focus for GBP/USD investors. The pound US dollar exchange rate dropped for the fifth straight session versus the US dollar on Wednesday as investors digested the Fed’s rate decision and as they look ahead to the highly anticipated Bank of England rate decision. The pound is falling again in early trade on Thursday.
Pound investors are pricing in the chances of an interest rate cut by the BoE today at 50/50. This has come down from around 70% at the beginning of last week. Data earlier in the month was disappointing as retail sales and inflation missing forecast. However, more recent data has been upbeat. PMI’s and business confidence have surpassed analyst forecasts whilst employment levels are the highest since 1970.
Even if policy makers focus on the improving data, this could just be a temporary bounce following the improved political landscape after a decisive Conservative win in the December election. Data could quickly deteriorate as the reality of UK – EU trade negotiations hit. The two sides have a very limited time-frame to complete complex negotiations. Success is questionable at best, meaning a no deal Brexit is still a very real possibility. Business investment is unlikely to ramp up amid continued Brexit uncertainty.
Investors are only pricing in a 50% probability of the central bank cutting interest rates. This means if the BoE does decide to ease monetary policy the pound could fall sharply.
The dollar retained its strength in the previous session, although was unable to extend gains after the Federal Reserve monetary policy announcement. The Fed, as widely expected, kept interest rates on hold at 1.5%-1.75%. They made only one small change to the policy statement; they described household spending as “moderate” rather than “strong”.
The continuity in policy and the statement indicates that the Fed still see the economy on a solid footing or “in a good place” as Fed Chair Jerome Powell often says. The dollar gave a muted reaction.
Today investors will look towards the US GDP reading, which is expected to show growth of 2.1% in the fourth quarter, in line with previous estimates.
| What do these figures mean? |
| When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.
For example, it could be written: 1 GBP = 1.28934 USD Here, £1 is equivalent to approximately $1.29. This specifically measures the pound’s worth against the dollar. If the US dollar amount increases in this pairing, it’s positive for the pound. Or, if you were looking at it the other way around: 1 USD = 0.77786 GBP In this example, $1 is equivalent to approximately £0.78. This measures the US dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the dollar. |
