Sterling slides vs. USD ahead of Fed, BoE meetings

Pound sterling slides against dollar ahead of Fed, BoE meetings

The British pound was declining against a strengthening dollar on Wednesday, with investors anticipating policy decisions from both the Bank of England and the Federal Reserve in the coming days.

At the time of writing on Jan. 31, the pound had decreased by 0.2% to $1.2671 against the dollar, with the GBP/USD pair poised to end the month with a 0.3% loss.

Kirstine Kundby-Nielsen, FX analyst at Danske Bank, told Reuters:

"Markets are just positioning themselves before the Fed tonight and Bank of England policy meeting tomorrow”.

Despite recent losses, sterling remains one of the top performers among the G10 currencies against the dollar this year, supported by the UK's robust economic performance and sticky inflation figures, with price increases appearing more persistent than in other regions.

Early indicators this month, such as the preliminary S&P Global/CIPS UK Composite PMI, suggested that the UK economy entered 2024 on a stronger footing, reaching a seven-month high.

It is widely anticipated that the Bank of England will keep current interest rates unchanged at its policy announcement on Thursday, with the market fully expecting the first rate cut by the June meeting.

Investors have scaled back their expectations for rate cuts from the Bank of England this year, with current market projections suggesting approximately 100 basis points of reductions in 2024, equivalent to about four quarter-point cuts. This is down from the previously expected five 25-basis-point cuts before UK inflation data for December was released in mid-January.

In comparison, the market is forecasting around 130 basis points of reductions from the Federal Reserve and nearly 140 basis points of easing from the European Central Bank in 2024.

Calculate your Forex margin

Calculate your hypothetical required margin for a Forex position, if you had opened it now..

Category

Majors

Majors

Minors

Exotics

Currencies

Instrument

Bid

Ask

Account Type

Retail Professional

Direction

Sell Buy

Quantity

Amount must be equal or higher than

Amount should be less than

Amount should be a multiple of the minimum lots increment

Calculate

USD

USD

EUR

GBP

CAD

AUD

CHF

ZAR

MXN

JPY

Leverage

-

Required Margin

$-

Required margin is displayed in instrument currency

Required Margin

$-

Required margin is displayed in selected account currency

Current conversion price:

-

Start Trading

Past performance is not a reliable indicator of future results.

Danske Bank negative on sterling, says BoE will follow ECB’s cutting cycle

The EUR to GBP rate was up 0.07% at 85.47 pence, indicating marginal strength in the euro. Pound sterling, however, is still on course for an almost 1.5% increase in January, marking its largest monthly gain against the single currency since May 2023.

Danske Bank's Kundby-Nielsen commented to Reuters:

"We don't expect inflation to deviate by the extent priced by markets and expect the Bank of England to follow the cutting cycle of the ECB, where we see the same inflation dynamics. That's one reason why we're negative on sterling from here”.

Analysts have noted that the absence of clear signals from UK policymakers ahead of Thursday's announcement could lead to increased volatility in the currency.

Reuters quoted Kamal Sharma, senior G10 FX strategist at Bank of America, as saying:

"We're operating in a bit of a void of information from the Bank of England, which is unusual coming into the first meeting of the year”.

Odds of March interest rate cut by Federal Reserve down to 45%

Markets.com Chief Market Analyst Neil Wilson weighed in on the Federal Reserve’s upcoming interest rate decision in his morning note on Wednesday:

“Fed meeting today is the big event – futures expect 150bps of cuts this year: will the FOMC disabuse markets of this? That amount of cutting is only really done in recessions and if it’s not then it can lead to too much exuberance in markets as in ‘87. And if the Fed does cut when unemployment remains so low and the economy barrelling along the way it is, what chance a second inflation wave? Do we get Volcker or Burns? Of course, market pricing encapsulates a lot of variables — it’s not necessarily what any single person thinks will happen.

Odds of a March cut are down to 45%, quite a bit down from the start of the year – the economy is doing well, labour market is tight and maybe the market overread the December ‘pivot’. But I would question whether the Fed wants to get the sequencing in early here – cut earlier but slower? Fed governor Waller pointed to this. And it’s an election year. Lots to consider – we could see some language change from the Fed today – dropping from the statement the bias for additional policy firming that would be a sign of easing bias. But in short a) no cut and b) no tie to March.”

At the time of writing on Jan. 31, the U.S. dollar index (DXY) — a gauge of USD’s performance against six major peers — traded slightly lower ahead of the decision at 103.30 (down 0.09%).

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.