The weakness of the dollar and the strength of the pound have resulted in an impressive August rally for the “cable” exchange rate. The GBP is the strongest in relation to the USD since March 2022. Recently, the divergence between the monetary policy of the Federal Reserve and the Bank of England has increased, which is largely responsible for the recent, dynamic upward move in the GBP/USD exchange rate. The dynamics were certainly increased by the currency pair breaking through two key technical resistances set by the peaks of July of this and last year.
At Jackson Hole, not only did the Fed chairman speak about the future of monetary policy. Andrew Bailey also spoke, expressing a willingness to further ease monetary conditions in the UK. Recall that the Bank of England began the process of cuts already in August, reducing the key interest rate by 25 bp from 5.25 to 5.00 percent.
Bailey emphasized that inflationary risk has decreased, however, it is too early to say that the fight against inflation has come to an end. According to his assessment, the scale of the “second round effect” was smaller than expected. The BoE chairman stressed that monetary policy still has to be restrictive. The market interprets this in such a way that further cuts may occur, but their scale will be small.
Core inflation in the UK is still above 3 percent year over year and recent decreases have lost momentum. The main CPI indicator, after dropping to 2 percent year over year, recently grew to 2.2 percent, which certainly did not escape the central bank’s attention.
At the moment, the OIS (Overnight Index Swaps) market gives little chance of a cut in September (around 25 percent). There is a much greater likelihood assigned to a decision in November (about 90 percent.) A December cut is priced in at just under 50 percent.
It is visible that, at this moment, the market assumes that the Federal Reserve shows a much more dovish attitude than the Bank of England which is reflected in the GBP/USD currency pair quote.
Łukasz Zembik, Oanda TMS Brokers.
Source: https://ceo.com.pl/sierpniowy-rajd-gbp-usd-co-stoi-za-dynamicznym-wzrostem-kursu-85710
