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- GBP / USD reference rate at publication:
- Place: 1.3660
- Bank transfers (indicative guide): 1.3280-1.3377
- Specialist money transfer rate (indicative): 1.3540-1.3590
- More information on obtaining specialized rates, here
- Set up an exchange rate alert, here
Volatility in the pound-to-dollar exchange rate faded after the sharp declines seen on Monday, with traders apparently reducing their exposure ahead of updates from the Federal Reserve on Wednesday night and the Bank of England on Thursday.
The pound-dollar fell more than half a percent on Monday and is holding around 1.3644 at the time of publication.
“While risk aversion has eased for now, the continued appeal of the US dollar as a safe haven will limit its setbacks as markets remain cautious, as will fears of a hawkish Federal Reserve surprise. American Wednesday, “said Richard Pace, a Reuters marketplace. analyst.
The question investors want to answer is how the Fed intends to approach the end of its quantitative easing program, with many expecting an announcement on Wednesday, with all roads pointing to a “cone” starting in December.
“Although domestic demand has slowed and cases of COVID are increasing, we believe concerns about supply bottlenecks and uncertainty about the inflation outlook will keep the Fed prone to decline sooner than late, “said Juan Prada, analyst at Barclays.
Above: GBP / USD has fallen back to an area that has attracted support in the past.
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The Fed’s issuance of updated forecasts on the development of Committee members’ interest rates in the coming years will potentially be more important for the markets.
The answers to these questions ultimately rest on the Fed’s assessment of a recent slowdown in economic growth.
“Investors still expect the Fed to signal its intention to decrease this week, but that it won’t start until the end of 2021, so the risk of a hawkish surprise and a stronger dollar is therefore linked. committee members’ interest rate projections – the dot plot, âPace explains.
The consensus expects one hike in 2022 and two in 2023 and as such, “it would take points to show two hikes in 2022, or four or more in 2023, to generate a hawkish response,” Pace explains.
There is a decent amount of uncertainty regarding the economic outlook given the increase in Covid-19 cases in the United States, weak global stock markets and searing inflation.
However, while a hawkish surprise would surely rekindle demand for USD, its gains may be limited. The market is not short of US dollars – as it was before the June Fed meeting – and still is. faced with the risk of a negative US dollar. PPI missed out on Thursday, “Pace said.
The pound side of the GBP / USD equation is expected to offer some volatility on Thursday when the Bank of England releases its latest valuation.
No policy changes are expected, but if more than one member of the Monetary Policy Committee (MPC) votes immediately to end quantitative easing, the pound could benefit.
In addition, a number of votes in favor of a rate hike could also be interpreted by the market in a pro-sterling fashion.
The Bank’s policy meeting in September comes amid skyrocketing gas prices that not only threaten to push inflation higher than the Bank’s current forecast anticipated in August, but also slow economic growth.
On the one hand, the Bank would like to ensure that inflation expectations do not get carried away given the already high levels of inflation, but on the other hand, any “hawkish” signal on the issue could act as a brake. to growth.
“We remain cautious on the pound given headwinds to growth due to supply constraints, the withdrawal of government support programs and higher taxes. The market is already forecast for two rate hikes in 2022. , so the risk is that the data ends up making ‘the tightening too scary’ as our economists like to say, âsays Daragh Maher, head of research, Americas, at HSBC.
Barclays economist Sanjay Raja said the current gas spike could lead to a 20% increase in the retail price of Ofgem gas, which in turn could lead to a 60 basis point increase in inflation overall by April.
This would boost the Bank’s existing inflation forecasts and call into question the viability of any argument that high inflation is transient.
“The overwhelming public discourse on inflation is becoming increasingly hawkish, as inflation expectations remain poised to move in a short-term direction: up,” Raja said.
The forex market assessment of the gas crisis is that it is negative for economic growth, evidenced by the clear underperformance of the pound in recent days.
The drop in GBP / USD and other GBP exchange rates is therefore symptomatic of a market preparing for a cautious tone from the Bank.
The upside risk, therefore, is that Gov. Andrew Bailey and other MPC members betray growing unease over inflation and signal that a rate hike in 2022 is warranted.
Any hawkish surprise could therefore help the pound recover from recent lows against the dollar.