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Central banks remain in focus

Daily Currency Update

GBP - British Pound

Though there are some important data points out this week, the market is keeping its focus on two central bank decisions, which has meant that the start of the week may be the quiet before the storm.

The Bank of England remains in the spotlight, with what could be the most eventful central bank meeting we have seen from them in recent times. After the emergency cut was made to the interest rate at the height of the pandemic, there is speculation that the UK's central bank will now reverse this decision, increasing the base rate by 15 bps or 0.15%.

Andrew Bailey, governor of the Bank of England, has dropped a number of hints that he is ready to act, predominantly on the rise in inflation in the UK. Soaring energy prices and supply chain issues have put prices on an upward trajectory, and he states that 'monetary policy can't solve supply side problems, but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations’.

If rates don't go up on Thursday, there could be a short term dip in the pound, but the central bank has ample opportunity to raise rates in ether their December or February meeting.

Key Movers

The Federal Reserve in the US has taken a slightly different stance on tightening its monetary policy. Instead of focusing on hiking interest rates, their focus remains on tapering their asset purchase programme.

For the first time since the pandemic began, the Federal Reserve could soon reduce the stimulus they provided during the COVID-19 crisis. The announcement could be made as early as tonight when the Federal Reserve has their next meeting. Given the significance of this move and what it means for the central bank’s economic outlook, one may expect the US dollar to strengthen more than it has, but since this is the market's worst kept secret in the last few months, it looks like these moves may have already been priced in.

Instead, the focus will be on the pace and the timing of the taper. The expectation is that the bank will taper at a rate of $15 billion per month, and the exercise will finish in the middle of 2022. But an increase on this is possible if the speed of inflation is greater than expected. This could be deemed aggressive and we may see the US dollar strengthen. On the contrary, if we see weak data in the US, then this tapering could be slowed down, potentially damaging the US dollar in the process.

ADP and ISM services data is being released from the US today, and this forms a good precursor for the Fed, to see how robust the US economy is ahead of starting their tapering programme, but it will be Friday's non farm payrolls which will likely be watched closest.

Expected Ranges

  • GBP/USD: 1.3575 - 1.3640 ▲
  • GBP/EUR: 1.1710 - 1.1790 ▼
  • GBP/AUD: 1.8220 - 1.8435 ▲
  • EUR/USD: 1.1560 - 1.1625 ▼