British Pound Reaches New Multi-Year Highs Following Decisions by the Bank of England and the Federal Reserve

Market Analysis by Quasar Elizundia, Expert Research Strategist – Pepperstone

– September 20, 2024 –

The British pound has reached new multi-year highs, briefly surpassing the 1.33 USD mark before losing some momentum after the Bank of England’s (BoE) decision to keep interest rates unchanged. This bullish move occurred amidst diverging monetary policies between the BoE and the United States Federal Reserve (Fed), causing volatility in the GBP/USD pair.

Divergence in Monetary Policies

The Fed initiated its normalization process yesterday by cutting rates by 50 basis points, marking the first easing in four years, bringing its reference rate to lower levels after reaching its highest since 2001. Despite this aggressive 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.

In contrast, the Bank of England decided to maintain the interest rate at 5% during its September 2024 meeting, following a previous 25 basis point cut in August, the first in over four years. The decision met market expectations, although one member of the Monetary Policy Committee advocated for an additional 25 basis point reduction to 4.75%. The BoE noted that a gradual approach to reducing monetary policy restrictions remains appropriate.

Impact on Currency Markets

The divergence in actions between these two major central banks has significantly influenced 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 worked in favor of 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, down from the 52 basis points expected before the decision. Meanwhile, the Fed has signaled the possibility of further rate cuts this year and next, a factor that has been weakening the US dollar and benefiting the pound.

Key Economic Data

UK Inflation: The annual inflation rate held steady at 2.2% in August, in line with market expectations. Inflation is projected to rise to around 2.5% by the end of the year, driven by the fading impact of last year’s energy price declines.
Services Inflation: Consumer price inflation in the services sector remained elevated at 5.6% in August, reflecting persistent inflationary pressures in the sector.
Wages and Economic Growth: Average weekly wage growth in the private sector decreased to 4.9% in the three months to July. GDP growth is expected to return to its underlying pace of approximately 0.3% per quarter in the second half of the year.

Monetary Policy Decisions

The BoE’s Monetary Policy Committee unanimously agreed to reduce its UK government bond holdings by £100 billion over the next 12 months, bringing the total to £558 billion. This measure is part of its strategy to normalize monetary conditions and reduce the stimulus provided in previous years.

Outlook and Considerations

Despite significant moves in interest rates, both the Fed and the BoE continue to advocate for a gradual approach in implementing their monetary policies. The caution reflected in the statements of the leaders of both central banks indicates a careful assessment of global and domestic economic conditions.

Fed Chairman Jerome Powell stated that there is no rush to ease policy and that aggressive cuts will not be the norm. Similarly, the BoE emphasized the need for a gradual approach to easing monetary restrictions, balancing support for economic growth and controlling inflation.

The GBP/USD pair has been forming an interesting structure that suggests upward pressure. After a period of consolidation in a symmetrical triangle pattern, the price recently broke upwards, surpassing the key level of 1.2900. This breakout strengthens the hypothesis that the bearish trend since the 2021 high may have ended, with a sustained rebound from the late 2022 lows.

A 76.40% Fibonacci retracement extension places the next target at 1.33314, a level that, if broken, could open the door to further recovery. In case of a correction, the 1.2900 level could act as significant support. In summary, GBP/USD has given a positive technical signal, but investors should await further confirmations before anticipating a move toward higher targets.