The British pound has recently surged to multi-year highs, briefly exceeding the 1.33 USD mark before losing some momentum following the Bank of England’s decision to keep interest rates unchanged. This bullish movement comes as a result of differing monetary policies between the Bank of England and the United States Federal Reserve, leading to fluctuations in the GBP/USD pair.
The Federal Reserve recently began its normalization process by reducing rates by 50 basis points, the first cut in four years, bringing its reference rate to lower levels after reaching its highest since 2001. Despite this move, Fed Chairman Jerome Powell emphasized that there is no rush to further ease monetary policy and that half-point rate cuts will not become the new standard pace. On the other hand, the Bank of England opted to maintain the interest rate at 5% during its September 2024 meeting, following a previous 25 basis point cut in August. The BoE noted that a gradual approach to reducing monetary policy restrictions remains appropriate.
The divergence in actions between the two central banks has significantly impacted the behavior of the GBP/USD pair in recent sessions. The notion of a relatively higher interest rate in the UK compared to the US has favored the pound against the dollar. Market operators now anticipate around 42 basis points of rate cuts by the BoE before the end of the year. Meanwhile, the Fed has hinted at the possibility of further rate cuts this year and next, weakening the US dollar and benefiting the pound.
In terms of economic data, UK inflation held steady at 2.2% in August, with projections of a rise to around 2.5% by the end of the year. Consumer price inflation in the services sector remained elevated at 5.6% in August, reflecting persistent inflationary pressures. Additionally, wages and economic growth are showing signs of stabilization, with GDP growth expected to return to around 0.3% per quarter in the second half of the year.
Looking ahead, both the Fed and the BoE are advocating for a gradual approach in implementing their monetary policies, reflecting a cautious assessment of global and domestic economic conditions. The GBP/USD pair is showing signs of upward pressure, with a breakout above the key level of 1.2900 potentially leading to further recovery. Investors should wait for further confirmations before anticipating a move towards higher targets.
