GBP/USD: on the eve of the publication of decisions of the Fed and the Bank of England on monetary policy

 
 
 
 
 
 
 

Today, the British pound has unexpectedly become one of the weakest of the major currencies against the dollar. If most of the major currencies are strengthening against the dollar today, then the GBP / USD pair is declining.

One of the most probable reasons is the anticipation of the outcome of the meetings of the US and UK central banks this week. If market participants are waiting for signals from the FRS about the imminent start of curtailing the stimulus program, then with regard to the results of the meeting of the Bank of England (on Thursday), investors' expectations are restrained.

Market participants do not expect the Bank of England to tighten its monetary policy in the near future. The Bank of England is likely to keep monetary policy unchanged despite a strong labor market and rising inflation.

The Bank of England is still convinced that consumer price inflation is a temporary phenomenon (the consumer price index CPI in August accelerated from zero to +0.7%, which was better than expected +0.2%. In annual terms, the CPI rose by +3.2% against the forecast at +2.9% and the previous value of +2.0%), while the imbalances between supply and demand will be smoothed out. At the same time, the improvement of the situation in the UK labor market looks unstable so far, economists say. They have revised their forecast for the Bank of England and now expect rate hikes no earlier than mid-2022.

The pound is also under pressure from the data released on Friday, according to which the volume of retail sales in August decreased by -0.9% (after falling by -2.5% in July and against the forecast of growth by +0.5%). In annual terms, the sales volumes showed zero dynamics, although the forecast assumed an increase in the indicator by +2.7%.

On Thursday (08:30 GMT) the UK Services PMI will be released, which is an important indicator of the health of the UK economy. The service sector employs most of the UK's working-age population and accounts for about 75% of GDP (financial services remain the most important part of the service sector). If the data turns out to be worse than the previous values (60.3 in August, 60.4 in July, 63.9 in June), then the pound is likely to decline in the short term, and this will be another argument in favor of the Bank of England's leadership to abstain from changes in the parameters of the current monetary policy. Is decision will also be published on Thursday at 11:00 (GMT). Of greater importance for investors will be the distribution of votes of the Board of Governors of the Bank of England for the rate cut / increase, as well as its comments on the future course of monetary policy.

Meanwhile, the strengthening of the dollar, including in the GBP / USD pair, is facilitated by the demand for safe-haven assets, supported by concerns about a slowdown in economic growth, accelerating inflation, and growing fears of a possible financial shock in China (due to fears of bankruptcy of the largest Chinese company in real estate China Evergrande Group), as well as strong macro data from the United States, including the better-than-expected report on retail sales (published last week, data on retail sales in the United States showed an increase of +0.7% in August against the forecast of -0, 8% and a fall of -1.1% in July. Retail sales of the control group of goods showed an increase of +2.5% in August) and positive weekly data from the US labor market on the number of applications for unemployment (the total number of people receiving benefits, decreased to 2.665 million people from 2.852 million a week earlier, and the average number of initial applications over the past 4 weeks on September 10 decreased from 340 thousand up to 335.75 thousand).

Futures on the DXY dollar index at the beginning of today's European trading session are near the mark of 93.18, 27 points below the day before yesterday's local intra-week high, and, despite the decline, maintain positive dynamics in the zone of local 9-month high of 93.75, reached in August.

On Thursday (at 13:45 GMT) fresh (September) data from the agency Markit Economics will be presented on business activity in the manufacturing and services sectors of the American economy (another increase in PMI is expected, significantly exceeding the 50 mark, separating the growth of business activity from its slowdown) and at 12:30 (GMT) the next weekly report of the US Department of Labor (it is expected that the number of initial applications for unemployment benefits in the US in the week before September 16 fell to 322 thousand, which is a positive factor for the dollar).

However, let us remind once again that the central event of today will be the publication (at 18:00 GMT) of the Fed's decision on the interest rate and a press conference that will start at 18:30 (GMT). During this period of time, a surge in volatility is expected throughout the financial market, including in the GBP / USD pair.

Although market participants do not expect that the Fed leaders will announce the curtailment of the stimulating policy (within its framework, they keep the key rate at 0.25%, monthly purchasing government bonds and mortgage bonds in the amount of at least 120 billion US dollars), the main intrigue lies in the fact that the leaders of the FRS can announce the possibility of starting the curtailment of the QE program this year. Many economists believe that the Fed may begin this process after the November meeting.

Thus, there is every reason to believe that the pressure on the GBP / USD pair towards its further decline will continue for now.