Relative Monetary Policy Still a Key Driver of GBPUSD



The spread between the UK and US 2-year notes (top chart) remains a strong driver of GBPUSD (middle chart). The current longer correlation is an impressive 86% (bottom chart). This suggests a strong positive relationship between the spread and cable.

The 2-year notes are also good proxies for monetary policy because the short end of the curve adjusts quickly to any changes in the cost of capital.

Today the Bank of England kept its official bank rate steady at 5.25%. This is the second consecutive time that the BoE has kept rates on hold, which suggests that we are at or near the apex of the current hiking cycle.

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The Bank of England did adjust its inflation forecasts upward by a slight margin. In their official statement, the BoE emphasised their preparedness to implement interest rate hikes in response to any signs of "more persistent inflationary pressures".

Six members voted to keep rates steady and three voted for a hike, which was close to forecasts. However, BoE Governor Andrew Bailey said that it is "too early" to talk about rate cuts and the statement states that rates need to be restrictive for "an extended period of time."

Initially GBPUSD jumped but has since pulled back. The R1 pivot is acting as immediate support. However, we note that the stochastic has crossed down (black ellipse) with the trend following EMAs threatening to do same.

This may be because the markets doubt the higher-for-longer narrative, with investors expecting at least two 25 bps cuts next year.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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