- The pound finds buyers at 1.3665 after a 0.75% daily decline.
- The sterling suffers against a stronger USD.
- GBP/USD’s reaction to the BoE is unpredictable – MUFG.
The British pound is attempting to find support at 1.3665 lows on Friday’s late US trading, after plummeting more than 0.7% on the day. End-of-month moves with November’s Federal Reserve meeting around the corner, have boosted the US dollar across the board.
The USD surges on expectations of a hawkish Fed statement
The GBP/USD has dropped sharply on Friday, weighed by broad-based US dollar strength in a combination of a moderate risk aversion, and higher expectations of a hawkish turn by the Federal Reserve next week.
US macroeconomic data might have encouraged investors to close US dollar shorts, especially after the Core Personal Consumption Expenditures, the Fed’s preferred inflation gauge, accelerated 3,6% year-on-year in September. These figures reaffirm the idea that the central bank will be forced to accelerate its monetary normalization plan, which has favored the US dollar.
Higher inflation expectations have also pushed the US Treasury bond yields higher, which has increased bullish traction on the USD.
All in all, the investors are bracing for an eventful next week, with the meetings of both, the Bank of England and the Federal Reserve scheduled. The Federal Reserve is expected to announce the end of its monetary stimulus, while, according to some market sources, the BoE might hike interest rates for the first time in three years in order to tackle inflation pressures.
GBP/USD’s reaction to BoE is unpredictable – MUFG
FX analysts at MUFG consider that the BoE could hike rates by 0.15% next week, although they warn about a negative GBP reaction: “Based on the recent FX response to central bank guidance we could well see GBP dismissing this guidance of slower tightening going forward. However, we would expect GBP to ultimately weaken on the back of a 15bp hike and guidance suggesting the need for less tightening than what is currently priced. That message may not be explicit but should be implied by the MPR forecasts.”