PoundSterlingLIVE -
- GBP/USD volatility unusually low
- Exchange rate primed for a break-out
- Bank of England on Thursday is key GBP risk
- Federal Reserve in focus on Wednesday
We continue to witness some incredibly calm trading conditions in the Pound to Dollar exchange rate, with six consecutive weekly closes above 1.2695 and below 1.2750.
What will break this love-in between two currencies that should traditionally offer decent amounts of volatility?
The recent easy-going nature of Pound-Dollar could be challenged this week as both the Federal Reserve and Bank of England deliver their latest policy decision and guidance updates.
Both will be keen to underline the belief that it is too soon to discuss interest rate cuts while simultaneously hinting that the time for such discussions is approaching.
Should the messaging land as desired, then Pound-Dollar can look forward to further limited volatility. But one only needs to look at Thursday's ECB event for a reminder that central bankers walk a fine line when trying to guide markets, and any slip-ups can deliver decent FX volatility.
Dominic Bunning, Head of European FX Research at HSBC (LON:HSBA) says the Bank of England will likely reveal sizeable downward revisions to its 2024 inflation forecasts this week.
"As well as a much less hawkish vote split than in December. This could open the door for the market to price in a greater probability of BoE cuts by May," says Bunning.
Bunning flags last week's European Central Bank policy update and subsequent Euro weakness as offering a potential template for the Bank of England and Pound Sterling.
"In the same way the ECB’s dovish rhetoric has weighed on EUR, we would expect GBP to come under pressure from a BoE tilt to an easing bias," says Bunning.
Last week saw the ECB keep its policy settings and guidance unchanged, but ECB President Lagarde's press conference sent a strong hint to markets that an April rate cut was possible.
Analyst Patrick Enrst at UBS says the Pound could fall should the market converge on the belief the Bank of England will cut interest rates as soon as May.
"We expect a first-rate cut in May, which should limit GBPUSD upside from a carry perspective. Overall, we think GBPUSD risks are skewed slightly to the downside from current spot levels in the short term, and we like selling upside exposure between 1.28 and 1.30," says Ernst.
The Federal Reserve will deliver its latest policy decision on Wednesday, with analysts expecting Chair Jerome Powell to resist explicit discussion on rate cuts.
"The Fed is in a comfortable position with regards to both sides of its dual mandate. Cooling inflation warrants cutting rates towards neutral, but solid growth and labour markets allow the Fed to move gradually," says Antti Ilvonen, an analyst at Danske Bank.
He warns, however, that the recent fall in U.S. bond yields, as a result of expectations for generous rate cuts in 2024, leaves the market vulnerable to a pushback from Powell. This is because increased bets for rate cuts are reflected in lower bond yields, which in turn weigh on lending rates.
Expectations, therefore, have real-world consequences that are at odds with the Fed's desire to loosen policy too soon.
Expect a stronger Dollar "if Powell pushes back on the market notion of rapid rate cuts, as we anticipate," says Ilvonen.
An original version of this article can be viewed at Pound Sterling Live
