GBP USD Losing Streak Extended by Fed Policy Expectations

A new day a new 11-month low for the pound against the dollar. The GBP USD pair slumped to 1.3304 on Thursday as the prospect of the US Federal Reserve tightening policy faster than expected gave the US currency a boost.

The Thanksgiving national holiday in the US meant monetary policy themed rhetoric from the central bank earlier in the month was driving dollar demand yesterday.

On Wednesday evening, the minutes from the Fed’s November meeting hinted at speeding up the winding down of its stimulus programme and hiking interest rates earlier than anticipated to control rising inflation.

“Various participants noted that the (policy-setting) committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the committee’s objectives,” it said.

“Participants noted that the committee would not hesitate to take appropriate actions to address inflation pressures that posed risks to its longer-run price stability and employment objectives.”

BoE’s Bailey says policy guidance is hazardous

Uncertainty over when the Bank of England (BoE) will raise interest rates has also been weighing on the pound this week.

With the BoE interest rate decision still on a knife-edge, Bank of England Governor Andrew Bailey said on Thursday that central banks should be more cautious when providing guidance around the direction of interest rates during times of economic uncertainty.

Mr Bailey, who was criticised by some investors for painting an unclear picture about the chances of a BoE rate hike earlier in November, told an event organised by the Cambridge Union that monetary policy guidance is still a relatively new tool for central banks.

“Obviously, in a world which is much more uncertain as to whether things will happen, then it’s much more hazardous to give that guidance,” he said.

By this morning, GBP USD had sunk to 1.32 for the first time since December 2020.

Looking ahead

There’s not an economic indicator in sight on either side of the Atlantic today. Investors in the pound and dollar must wait until next week for influential data. On Monday, US pending home sales hit the headlines, but the UK economy doesn’t provide any notable data sets until Wednesday when the Markit manufacturing purchasing managers’ index (PMI) for November is published.

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