October 7, 2024 (Globalinvestorideas.com Newswire) Globalinvestorideas.com, a go-to platform for big investing ideas releases market commentary from Rania Gule Senior Market Analyst at XS.com.
The GBP/USD pair has seen some modest gains after a three-day losing streak, rising to around 1.3130 in the early hours of Monday. However, these gains appear to be limited given the shifting dynamics surrounding the monetary policies of both the U.S. Federal Reserve and the Bank of England. While Friday’s U.S. non-farm payrolls data showed stronger-than-expected performance, which bolstered the U.S. dollar, the dovish stance of the Bank of England reflects a weakness that may negatively impact the British pound.
In my view, one of the main factors influencing the GBP/USD pair’s movement is the Federal Reserve’s decision to cut interest rates by 50 basis points in September, which could support the U.S. economy and reduce the likelihood of a larger cut in the future. Additionally, the recently strong non-farm payroll data, which showed that the U.S. economy added 254,000 jobs in September compared to 159,000 in the previous month, weakens expectations of a more significant rate cut. The annual wage growth increase to 4.0% and the drop in unemployment to 4.1% further strengthen the labour market, suggesting that the Fed might adopt a more cautious approach to rate cuts, limiting the U.S. dollar’s losses against other currencies.
Nevertheless, I believe the modest gains achieved by the GBP/USD pair may diminish if the Bank of England continues to adopt a dovish monetary policy. Last week, Bank of England Governor Andrew Bailey hinted that the central bank could be “more dovish” in cutting interest rates if inflation continues to ease as expected. This signal increases the likelihood of the pound being undermined if interest rates are reduced faster or more significantly than anticipated.
On the other hand, the Bank of England’s Chief Economist, Huw Pill, expressed a more cautious tone, stating that the central bank should only take gradual steps in cutting rates, creating a divide in the financial markets regarding the future direction of monetary policy. This divergence in views introduces uncertainty, in my opinion, about the near-term outlook for the British economy.
Currently, financial markets are divided on whether the Bank of England will cut interest rates again in December following a potential cut in November. Cutting rates in back-to-back meetings hasn’t occurred since 2020. From my perspective, this division reflects the uncertainty surrounding the British economy’s trajectory, especially given the persistent inflationary pressures that continue to challenge the Bank of England.
Meanwhile, markets are now pricing in a more limited Fed rate cut in September, at 25 basis points, with a nearly 97.4% chance, up from just 31.1% before the non-farm payrolls report. These changes in U.S. monetary policy expectations could create a balance in the relative strength between the U.S. dollar and the British pound in the short term.
The current strength of the U.S. dollar is driven by optimistic economic data, which points to the resilience of the U.S. economy despite ongoing challenges. In contrast, the British pound seems to be in a weaker position due to the Bank of England’s dovish stance.
Thus, shortly, the upside for the GBP/USD pair may remain capped unless there are significant changes in the economic landscape. Investment in the pair will largely depend on investor expectations regarding the monetary policies of both countries, as well as the British economy’s ability to manage inflationary pressures and achieve sustainable growth.
Looking ahead, the tension between the divergent monetary policy paths of the U.S. and the U.K. will remain a crucial factor in determining market trends, in my view. If the Bank of England continues to cut rates faster than expected, additional downward pressure on the British pound could ensue, making it more vulnerable to declines against the U.S. dollar. Conversely, if the Federal Reserve surprises markets with a rate hike or adopts a more hawkish stance in its upcoming meetings, the U.S. dollar could gain further strength, weakening the pound’s recent gains.
In conclusion, the GBP/USD pair seems to be on a delicate balance, with diverging expectations surrounding the monetary policies of the major central banks.
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