The Monetary Policy Divergence: Fed vs Bank of England

The Monetary Policy Divergence: Fed vs Bank of England

The end of the year has brought about contrasting monetary policy decisions between the Federal Reserve (Fed) and the Bank of England. While the Fed has signaled rate cuts for 2024, three members of the Bank of England’s Monetary Policy Committee voted for a 25-basis point interest rate hike. This significant difference in policy decisions has led to a divergence in monetary policy, particularly affecting the Pound. In this article, we will analyze the implications of these decisions and their impact on the GBP/USD exchange rate.

UK Economic Indicators and Narratives

On Thursday, there are no UK economic indicators that are expected to change the current narrative. As a result, the GBP/USD is likely to remain supported at its current levels. However, it is crucial for investors to closely monitor the commentary from the Bank of England. Any remarks regarding the economic outlook, inflation, and interest rates could significantly influence market sentiment and shift the exchange rate.

In addition to monitoring Bank of England commentary, investors should also pay attention to the US economic indicators that will be released on Thursday. Of particular interest are the initial jobless claims and pending home sales data. A surprising decrease in jobless claims could test market expectations of a Federal Reserve rate cut in the first quarter of 2024. A tighter labor market in the US would support wage growth and disposable income, potentially fueling consumer spending and demand-driven inflation. This scenario may lead to delayed rate cuts by the Fed, aimed at curbing consumer spending and suppressing inflation.

Another key indicator to consider is pending home sales, which economists predict to increase by 1.0% in November. October saw a decline of 1.5% in pending home sales. The housing sector data is considered a leading indicator for the US economy. A flourishing housing market would boost consumer confidence, increase consumer spending, and raise the likelihood of a soft landing for the economy.

Apart from economic indicators, the commentary from the Federal Reserve is also crucial to monitor. Any references to inflation, the economic outlook, and interest rates need to be carefully considered. It is expected that GBP/USD trends in the near term will largely depend on both Bank of England commentary and US economic indicators.

From a technical perspective, the GBP/USD has shown bullish price signals as it held above the 50-day and 200-day Exponential Moving Averages (EMAs). A move through the $1.28500 handle would give the bullish momentum a chance to test the $1.29 handle. However, if the support level at $1.28013 is broken, it may result in a downward move towards sub-$1.27 and could bring the 50-day EMA into play. The 14-period daily Relative Strength Index (RSI) reading of 64.56 suggests that GBP/USD may reach $1.29 before entering overbought territory.

The divergence in monetary policy decisions between the Fed and the Bank of England has had a significant impact on the GBP/USD exchange rate. While the Fed signals rate cuts for 2024, three members of the Bank of England’s Monetary Policy Committee have voted for an interest rate hike. In the absence of UK economic indicators, the focus shifts to Bank of England commentary and US economic indicators. The decisions and comments from both central banks will shape the future trends of the GBP/USD exchange rate.

Forecasts

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