Pound Edges Higher ahead of FOMC

Fundamental analysis of Forex market

The British pound has edged higher in the Wednesday session. GBP/USD is currently trading at 1.3644, up 0.22% on the day.

FOMC will likely taper, but by how much?

The FOMC holds a key policy meeting later today, with the Fed widely expected to press the taper trigger and scale back its USD 120 billion/mth bond purchase program. The magic question which will be answered shortly is how far will the Fed go? The markets are expecting a trim of USD 15 billion/mth, and anything else could shake up the US dollar. A smaller taper would be considered a dovish move and would weigh on the greenback, while a larger reduction would make the equity markets nervous and put upward pressure on the US dollar.

What about interest rates? Fed Chair Jerome Powell has not shied away from reminding the markets that a Fed taper does not mean that a rate hike is imminent, but that won’t stop the markets from speculating on the timing of a rate hike. It would be a surprise if Powell gives a timeline for a rate hike, as the Fed appears split on when to start hiking. There is a significant disconnect between market expectations and the Fed on rate policy, with the markets pricing in a move in 2022, while some FOMC members are looking at 2023 or even 2024.

Will BoE raise rates?

The BoE follows with a policy meeting on Thursday. This is shaping into one of the most unpredictable meetings in years, as it is unclear whether the bank will raise rates or maintain the current rate of 0.10%. A hike would likely be limited to 15 basis points, but such a move would mark the first hike by a major central bank since the Covid pandemic hit in early 2019.

BoE Governor Andrew Bailey and two other MPC members are in favor of a hike; two members have voiced strong opposition to the move and four members have not stated their views. Analysts are split on which way the vote will go, which means there is a strong chance of volatility from the pound, whatever the outcome of the vote.

GBP/USD Technical Analysis

  • GBP/USD faces resistance at 1.3793 and 1.3892
  • There are support levels at 1.3632 and 1.3570