GBP/USD Jumps After the FOMC, But There’s Downside Risk From BOE

The rate of GBP to USD surged around 100 pips higher yesterday after the FED left everything as it was before, but GBP/USD will be prone to the BOE as well today, which will hold it’s meeting soon. They’re not expected to change anything, but a deviation form expectations might send the GBP crashing lower, as it happened with the US Dollar yesterday.

GBP/USD Daily Chart – Bouncing off the 50 SMA

GBP/USD was retreating lower since early last week, losing more than 200 pips. But the 50 SMA (yellow) held as support on the daily chart and Tuesday’s candlestick closed as a hammer, which is a bullish signal after the retreat. Yesterday this forex pair was stagnating for most of the time, but it jumped 1 cent higher to 1.2780s after Powell’s comments which were dovish for the USD, as shown below.

Yesterday’s Take from the FED

Yesterday the FED Dot Plot continued to show three interest rate cuts for 2024, while markets were expecting 2 cuts. However, the main emphasis was placed on the Federal Reserve Chair Jerome Powell yesterday, who remarked that while inflation has eased substantially, it still remains elevated. He expressed uncertainty about the path forward, emphasizing that the economy has made considerable progress, and risks are moving into better balance.

Powell noted that activity in the housing sector was subdued last year but highlighted that GDP has been bolstered by strong consumer demand and healing supply chains. He also mentioned that longer-term inflation appears to remain well anchored, and inflation has eased notably. So, he didn’t sound too worried and the market took this as confirmation of the Dot Plot, sending the USD lower.

What to Expect from the Bank of England?

Yesterday’s UK inflation report marked the first report since the Spring Budget, during which Chancellor Jeremy Hunt made a bold prediction that inflation would meet the 2% target in 2024, a year ahead of the Bank of England’s projection. However, the actual Consumer Price Index (CPI) figures revealed a different story. While the CPI was expected to climb by 3.6% year-on-year, slightly down from 4% in January, the actual CPI figure dipped to 3.5%. Additionally, Core CPI year-on-year fell short of expectations, coming in at 4.5% compared to the anticipated 4.6% for February.

Inflation in the UK is indeed slowing, as indicated by the recent data. However, policymakers at the BOE are likely to remain cautious until the Consumer Price Index (CPI) returns to the 2% target, which is considered the desired level for price stability. The fact that CPI reached 11.1% in October 2022 and has since dropped substantially underscores the significant decline in inflationary pressures over the past several months. This downward trend in inflation suggests that the economy may be experiencing some relief from the earlier surge in prices. So, this might lead to some docish comments from the BOE which will likely send the GBP 100-200 pips lower.

GBP/USD Live Chart