GBP/USD: on the eve of the Bank of England meeting


Having completed the past week with an increase of 1.8%, the new week, the 6th in a row, the dollar also starts on a positive note. At the time of publication of this article, DXY dollar index futures are traded near the 99.17 mark, maintaining a tendency to further growth. The dollar is growing in anticipation of the outcome of the Fed meeting and against the backdrop of the release of February data on inflation in the US. According to data released last week, the consumer price index rose from 7.5% to 7.9%. Core CPI rose from 6.0% to 6.4% in February. Inflation in the US thus rose to new 40-year highs. These data do not yet reflect the impact of the situation in Ukraine, and March inflation may be even higher. According to US Treasury Secretary Janet Yellen, the country is waiting for another year of rising prices against the backdrop of the Ukrainian crisis. The current situation is forcing the Fed to act, on the one hand, decisively, raising interest rates, on the other hand, cautiously, given the geopolitical tensions. It is expected that on Wednesday, when the Fed meeting ends, its leaders will raise interest rate by 0.25%. However, market participants fear indecision on the part of the Fed to significantly reduce inflationary pressures. If before Russia's military special operation in Ukraine, market participants were waiting for 6-7 increases in the Fed's interest rate this year, now these expectations have dropped significantly. The 0.25% interest rate hike is already priced in. However, the dollar continues to rise. Investors prefer it to other traditional defensive assets such as gold and the yen. Of greatest interest will be the Fed's press conference, which will begin half an hour after the publication of the decision on rates. Investors want to hear from the head of the Fed, Powell, his opinion on the future plans of the central bank for this year. Of interest will also be the FRS report with forecasts for inflation and economic growth for the next two years and, no less important, individual opinions of FOMC members on interest rates.

A more hawkish stance on monetary policy is viewed as positive and strengthens the US dollar, while a more cautious stance can be seen as indecision and negatively affect the USD.

In addition to the Fed, the meetings of the central banks of Japan and Great Britain will also take place this week. The pound received some support after the publication last Friday of positive macro statistics. In January, British GDP rose from -0.2% to +0.8% (+10% year-on-year, from 6.0% in December), which also turned out to be much better than economists' forecasts. All major sectors of the economy increased. The service sector - by 0.8%, the manufacturing sector - by 0.7%, the construction sector - by 1.1%. However, economists believe that GDP growth could be seriously reduced in the near future, as the economy is under pressure from the consequences of the military conflict in Ukraine. In the meantime, the ongoing recovery of the UK economy speaks in favor of a further increase in the key interest rate, given the strong rise in inflation in the country. The decision on interest rates of the Bank of England will be published on Thursday at 12:00 (GMT). It is expected that at this meeting the Bank of England will again raise the interest rate (up to 0.75%), while maintaining the volume of purchases of government bonds at the same level of 895 billion pounds. However, despite the fact that very positive macro data is coming from the UK, the interest rate may also remain at the same level of 0.50%, given the situation in Ukraine.

Also at the same time will be published the report of the Bank of England on monetary policy, containing an assessment of economic prospects and inflation. If the tone of the report is soft, then the British stock market will receive support, and the pound will fall. Given the uncertainty surrounding the Ukraine crisis, fewer members of the Monetary Policy Committee will vote in favor of a stronger rate hike compared to last month, when 4 out of 9 members supported such a move. This could reduce the likelihood of a rate hike at the next two meetings, which would be negative for the pound, economists say.

Conversely, the report's tough rhetoric on curbing inflation, which implies a further increase in the interest rate in the UK, will lead to a strengthening of the pound.

In connection with the upcoming meeting of the Bank of England, market participants will be interested in the report of the UK National Statistics Office (ONS) with data on the average salary of the British and the unemployment rate.

 Earnings growth is a positive factor for the GBP, while the low value of the indicator is negative. The March report suggests that the average salary, including bonuses, rose again in the last calculated 3 months (November-January), by +4.6% (after growth of +4.3%, +4.2%, +4.9% , +5.8%, +7.2%, +8.3%, +8.8%, +7.3%, +5.6%, +4.0% in previous periods); without premiums also increased by +3.7% (after growth by +3.7%, +3.8%, +4.3%, +4.9%, +6.0%, +6.8%, +7.4%, +6.6%, +5.6%, +4.6% in previous periods). The data points to continued growth in wages, which is a positive factor for the pound. Data worse than forecast/previous values ​​will have a negative impact on the pound. It is also expected that for 3 months from November to January, unemployment was at the level of 4.0% (against 4.1%, 4.2%, 4.3%, 4.5%, 4.6%, 4.7% , 4.8%, 4.7%, 4.8%, 4.9%, 5.0%, 5.1%, 5.0% in previous periods). This is also a positive factor for the pound.

If the data from the UK labor market turns out to be worse than the forecast and / or the previous value, then the pound will be under pressure. In any case, at the time of publication of data from the British labor market, an increase in volatility in its quotes and in the GBP/USD pair, respectively, is expected.