GBP/USD Adopts ‘Wait and See’ Approach Ahead of FOMC, BoE

May 4, 2022

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CABLE (GBP/USD) NEWS AND ANALYSIS

FOMC, BoE rate announcements and NFP provide plenty event risk
UK economic landscape amid ‘cost of living crisis’ puts BoE in a tight spot, weighing on sterling
Key technical levels considered ahead of central bank week

BUSY WEEK AS THE FED, BOE AND NFP TAKE CENTER STAGE

GBP/USD Adopts ‘Wait: The economic calendar reveals a flurry of high importance risk events starting with US Services PMI for April, the Fed and BoE interest rate decisions and ending the week off with US non-farm payroll data. UK S&P Global manufacturing PMI data earlier today provided a glimmer of hope as it printed at 55.8, higher than the March low of 55.2 (weakest figure over the last 12 months). Nevertheless, more than 60% of manufacturers raised prices in April in response to rising input costs while lackluster demand from the EU; linked to longer delivery times, customs checks and higher shipping costs weighed on the manufacturing industry.

GBP/USD TECHNICAL AND FUNDAMENTAL FACTORS TO CONSIDER THIS WEEK

Despite having witnessed a massive drop from 1.3000 all the way to 1.2410, cable appears to have consolidated at current levels, which is understandable as the two respective central banks are set announce their interest rate decisions later this week (Fed tomorrow and BoE on Thursday).

Such a ‘wait and see’ approach is quite normal in the lead up to massive meetings as both central banks decipher how large their rate hikes will be. Markets expect the Federal Reserve Bank to hike by 50 basis points, taking the Fed funds rate to 0.75% – 1%, with a 6% outside chance of a 75 basis point hike.

Implied Rate Hike Probabilities via Fed Futures

GBP/USD Adopts ‘Wait

The Bank of England (BoE) are a little further along in the rate hiking process but the economic landscape proving all the more difficult with the ‘cost-of-living crisis’. The UK is experiencing its highest inflation in 30 years and economic headwinds on top of that. The IMF forecasts the UK to be hardest hit among G7 nations when it comes to GDP growth and inflation expectations for 2022. Raising rates is a two-edged sword as it is crucial to quell rising inflation but raises the cost of living as interest-linked repayments (car, mortgage) will increase.

Implied Rate Hike Probabilities (BoE)