Pound edges lower ahead of FOMC, BoE

The British pound has resumed its downswing on Wednesday, after taking a pause on Tuesday. GBP/USD is currently trading at 1.3645, down 0.11% on the day.

Will BoE hint at an interest hike?

The markets will have plenty to digest this week from central bankers, with the Federal Reserve holding a policy meeting on Wednesday, followed by the Bank of England on Thursday. With the UK economy recovering well from the Covid-19 downturn and inflation well above the BoE’s 2% target, there have been calls for the Bank to tighten policy earlier rather than later, perhaps in early 2022. The BoE had signalled its plan for ‘modest tightening’ in the next few years, but policy makers haven’t indicated a timeline regarding a rate hike.

The Bank tightened policy in May, when it tapered its bond purchases from GPP 4.4 billion a week to GBP 3.4 billion a week. Granted, this was a minor move, but it was nonetheless an important signal to the markets that the BoE was giving a vote of confidence to the UK recovery. The markets are expecting a rate hike in 2022, but I wouldn’t be surprised if at the Thursday meeting policymakers steer away from a timeline on a rate hike and focuses on economic conditions.

The markets are eagerly awaiting the Federal Reserve policy meeting later today. There are expectations that the Fed may signal that it will make an announcement at the November meeting as to whether it will begin tapering. The Fed may take a hawkish turn by bringing forward projections of a rate hike in the dot plot. The previous dot plot pointed to rate hike in 2023, but there is a good chance that this will be brought up to 2022. If this occurs, the US dollar and Treasury yields could respond with gains in the North American session.

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GBP/USD Technical Analysis

• There are resistance lines at 1.3851 and 1.3975
• The pair is testing support at 1.3666. Below, there is support at 1.3605

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