During Friday’s trading, the GBP/USD pair oscillates around the 1.2602 level after a significant downward wave.
The Bank of England (BoE) has yet to find strong reasons to lower interest rates, indicating its intention to maintain high-interest rates for a longer period to support continued moderate decline toward the central bank’s targeted inflation level.
I believe that the Bank of England’s monetary policy remains constrained.
In its recent meeting, the BoE kept the interest rate unchanged at 5.25% annually, with no change. The bank’s core inflation target is 2%.
Official forecasts suggest that the UK’s consumer price index is likely to reach this target by the second quarter of 2024, with no expectation of rapid changes in monetary policy stances, making economic data and figures akin to storms hitting the markets each time.
From my perspective, the markets are currently experiencing “disappointment” because the Bank of England has not provided any information on new future monetary policies, while major central banks around the world have begun (at least verbally) to move clearly towards maintaining tightened monetary policy.
The Bank of England remains different and ambiguous, sticking to a conservative “wait-and-see” approach cloaked in mystery.
I likely believe that the Bank of England will continue its current strategy until the end of the first half of 2024. It will continue to wait to see the results of interest rate hikes by the Federal Reserve and the European Central Bank and monitor currency reactions before considering any steps towards tightening based on future inflation data, figures, and trends.
Bank of England Governor Andrew Bailey has said that the economy is not at a stage where the Monetary Policy Committee can lower interest rates. Still, the economy is moving in the right direction.
Therefore, the Bank of England will need more evidence of moderate wage growth before starting to lower interest rates. While markets continue to price interest rate cuts this year, this affects the British pound and acts as clear negative pressure on GBP/USD exchange rates.
On the other hand, the Federal Reserve kept interest rates unchanged at 5.25-5.50% at its meeting last Wednesday, but it was clear in its future monetary policy stance by retaining an average expectation of three rate cuts in 2024. It became very close to market estimates, with roughly an 80% chance that the Fed will cut interest rates in June 2024.
Thursday’s data, the S&P Global Composite Purchasing Managers’ Index (PMI) reached 52.5 in March from 52.5 in February, higher than market expectations at 51.8. The services PMI fell to 51.7 in March from the previous reading of 52.3, weaker than expected at 52.0, leaving markets confused and weak, especially regarding the movement of the US dollar index after its recent rise.
From my perspective, markets await a storm of price volatility on Friday, with the market awaiting UK February retail sales figures. There is anticipation for talks by Federal Reserve Chairman Jerome Powell and Michael Barr on Friday. There will also be market opportunities resulting from data, with opportunities to trade the GBP/USD pair, but there must be a clear and strong strategy and prudent risk management.
