The GBPUSD pair was under intense pressure on Wednesday morning as investors refocused on the upcoming interest rate decisions by the Federal Reserve (Fed) and the Bank of England (BOE). The pair was trading at 1.3630, which was about 1.50% below the highest point last week.
The biggest catalyst for the GBPUSD in the next two days will be the Fed decision. The Federal Open Market Committee (FOMC) will conclude its two-day meeting on Wednesday evening.
Economists expect that the Fed will sound a bit hawkish about the economy. For example, the bank will likely leave interest rates unchanged. At the same time, the closely watched dot plot will show that more officials are optimistic that rate hikes will start in 2022. In the previous meeting, the dot plot signaled that the bank will have about 6 and 7 rate hikes by 2024.
In addition to the dot plot, the next key thing that will move the GBPUSD will be the bank’s decision on tapering of asset purchases. Some analysts expect that the bank will start tapering off the $120 billion per month purchases.
According to the WSJ, the bank will likely start slowing down these asset purchases by about $15 billion per month.
This tapering and the relatively hawkish statement will aim at containing runaway inflation that is going on. For example, recent data showed that the personal consumer expenditure (PCE) remained at the highest level in 31 years. Similarly, the consumer price index (CPI) is at the highest level in more than 13 years.
Still, the biggest challenge is that a tighter monetary policy will not help stabilize prices. This is because the current inflation is mostly driven by the supply side. For example, the chip shortages have led to higher car prices. Therefore, a tighter monetary policy will not help solve these issues.
The next key catalyst for the GBPUSD pair will be the Bank of England (BOE) decision scheduled for Thursday.
Like the Fed, the BOE is battling with the challenge of inflation. These prices have risen substantially because of the recent surge of oil and gas prices. Oil prices have surged to the highest level in 7 years, while natural gas has risen to the highest level on record. The UK also went through a period of fuel shortage, which boosted prices.
Therefore, analysts expect that the BOE will also turn hawkish. It will leave interest rates unchanged at 0.10% and then lower the size of the asset purchases. The unemployment rate has already fallen, while the BOE chief economist expects that inflation will rise to more than 5% in the coming months.
After the BOE decision, the GBPUSD pair will react to the US jobs data. ADP will publish its estimate of private payrolls on Wednesday, while the Bureau of Labor Statistics (BLS) will publish initial jobless claims data on Thursday. The number will be followed by the official non-farm payrolls data on Friday.
The four-hour chart shows that the GBPUSD pair made a bearish breakout below the descending channel last week. Since then, it has moved below the 50% Fibonacci retracement level. It has also moved below the 25-day and 50-day moving averages while the MACD has continued falling. Therefore, the path of the least resistance for the pair will be to the downside. If this happens, the next key level to watch will be at 1.3500.