**GBP/USD: BoE Has Tough Act to Follow After Fed Cuts Rates**
*By Anil Panchal, originally published on FXStreet*
The British pound (GBP) has faced mounting pressures as traders digest recent central bank decisions and await more monetary cues. Following the US Federal Reserve’s latest rate cut, attention turns to the Bank of England (BoE), which now stands in a challenging position. The GBP/USD pair exemplifies these cross-currents, reflecting not only central bank divergence but also mounting uncertainties on the economic and political fronts.
**Fed Cuts Rates and Impacts on GBP/USD**
The Federal Reserve’s decision to lower interest rates by 25 basis points was widely anticipated. However, the accompanying communication left markets searching for clarity about the US central bank’s future direction. The Fed stated that the economic outlook remains favorable, but that rising global risks and muted inflation warranted a proactive stance.
*Key Points about the Fed Decision:*
– The target range for federal funds was lowered to 2.00-2.25 percent
– Statement cited “implications of global developments” and “muted inflation pressures”
– The vote was not unanimous: two policymakers preferred to leave rates unchanged, while one pushed for a deeper 50 bp cut
– No strong commitment was made regarding further rate reductions; instead, the Fed emphasized data dependency
Market reaction was notably volatile. Equities and risk assets initially rallied on the move, but reversed after Fed Chair Jerome Powell suggested the cut was a “mid-cycle adjustment” and not the start of a prolonged easing cycle. The US dollar broadly strengthened, weighing on GBP/USD.
**BoE’s Dilemma: Follow the Fed or Stay Put?**
The Bank of England now faces an even more complex backdrop. UK economic conditions have softened, and the political situation remains fraught as Brexit uncertainty lingers. There is increasing debate over whether the BoE should follow the Fed into an easing cycle, especially since the move would help prevent further pound appreciation and related tightening of financial conditions.
*Challenges Facing the BoE:*
– Persistently weak economic data including subpar GDP growth and tepid inflation
– Heightened risk of a no-deal Brexit with limited parliamentary consensus
– GBP weakness already providing some offset via trade competitiveness, but also lifting import prices
– The timing and sequencing of any rate moves is complicated by global trends
In its recent communications, the BoE has argued that, all else equal, rates may need to rise if Brexit proceeds smoothly. However, with evidence of slowing global growth and the Fed’s preemptive move, market pricing now leans toward a rate cut over the next twelve months.
**Recent GBP/USD Price Action**
The pound has traded defensively against the US dollar, hit after the Fed’s decision and amid lingering UK-specific risks. GBP/USD initially attempted to rally following the Fed’s policy announcement but quickly reversed, falling back toward monthly lows.
*Summary of the Recent GBP/USD Movement:*
– Attempted relief rally post-Fed was short-lived as the dollar gained on Powell’s cautious message
– GBP/USD slid toward 1.2100 with little support, as sterling remained under pressure
– Technical indicators suggest bearish momentum, with key short-term support and resistance levels coming into focus
Much of the recent movement can also be attributed to positioning ahead of the BoE and ongoing Brexit headlines.
**Critical Factors Influencing GBP/USD Going Forward**
For traders and investors, several major drivers will determine whether the British pound can stabilize or faces further losses in the weeks ahead:
*1. Bank of England Policy Outlook*
Markets are now pricing in higher probabilities of a BoE cut later in 2024, especially if global uncertainties continue and UK data disappoints. Should the BoE signal an openness to easing or acknowledge downside risks more forcefully, the pound could come under renewed pressure.
*Key BoE Communication Themes to Watch:*
– Comments on global slowdown and Fed policy
Read more on GBP/USD trading.