GBP/USD Supported after the Recent Fed & BOE Rate Hikes
Tame Fed
Just before the collapse of the Silicon Valley Bank, Fed Chair Powell had ramped up his rhetoric due to sticky inflation and strong labor market, with markets expecting an acceleration in the pace of tightening and a higher terminal rate.
Things however quickly changed due to the ensuing banking turmoil that sparked fears around the health of the financial system. The central bank was constrained to a small 0.25% rate hike, made a dovish shift to its forward guidance and maintained the 5.1% median terminal rate projection, which suggests just one more increase before pausing. [1]
Markets appear more dovish, as CME's FedWatch Tool assigns the highest probability to rates having peaked at the current 5.00% and cuts down to 4.5% by the end of the year. [2]
BoE Rate Hike
After last month's meeting, the Bank of England had not committed to another hike, but had not shut the door to further tightening either. The financial rout could have led to a pause, but the intervening inflation data did not leave much option for such an outcome.
Headline CPI Inflation rose 10.4% y/y in February, breaking the three-month declining streak, while Core jumped 6.2%. This forced officials to a half-percentage hike, the eleventh straight move in the tightening process that started in late-2021. [3]
In typical BoE fashion, two policymakers dissented in favor of a pause, while communication remained unclear. The bank reiterated its murky guidance that "further tightening in monetary policy would be required" if dictated by the data, once again keeping all options on the table.
GBP/USD Analysis
Both banks raised rates by a quarter-percentage point last week, but this actually narrowed the policy differential, as it constituted a dovish shift for the Fed and a hawkish (or less dovish) action by the BoE.
This helped GBP/USD extend its rebound from the 2023 lows, having now entered its third straight profitable week. This brings this year's highs in its crosshair (1.2249), but we are cautious for further advance that towards 1.2267.
The recent advance though may be nearing end, as we are not sure that monetary policy can carry the pair much further. Pressure back to the EMA200 (1.2130-40) would be reasonable, although a strong catalyst would be required for daily closes below it that would stop its momentum.
Nikos Tzabouras
Senior Market Specialist
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
References
| Retrieved 28 Mar 2023 https://www.federalreserve.gov/monetarypolicy/fomcpresconf20230322.htm | |
| Retrieved 28 Mar 2023 https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html | |
| Retrieved 24 Sep 2023 https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2023/march-2023 |
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