The foreign exchange market remains steady on Wednesday morning as investors prepare for the latest monetary policy decision from the US Federal Reserve. While interest rates are set to remain unchanged, the central bank is “widely expected to announce it will begin to wind down its $120B in monthly bond purchases and end the program entirely by the middle of 2022”. The process of “tapering” will mark a significant shift for the Fed, as it will be stepping away from a “historic level of support for the economy and into a new regime in which it will still be using its tools to a lesser degree”.
Investors are also eagerly awaiting the “most unpredictable interest rate decision in years” from the Bank of England on Thursday. With UK inflation set to rise to 5% - more than double the BoE’s 2% target – Governor Andrew Bailey has noted the banks “need to act to contain inflation”. The markets expectation that the BoE will be the first of global central banks to hike rates has been the main catalyst of Sterling’s recent strength. Thus, whatever the BoE decide on tomorrow, it will likely induce heightened volatility in Sterling.
Another significant risk to Sterling is the increasing number of UK COVID-19 cases and deaths. On Tuesday the UK recorded another 33,865 fresh cases and 293 COVID-19 related deaths – causing serious concern among investors. Despite the UK’s “world-leading” vaccine programme and over 8M Brits having had the booster vaccine, the number of people hospitalised by COVID-19 are up. There were 9,538 people in hospital with COVID-19 on Monday, compared with 6,467 a month ago.
Cable came under more pressure on Tuesday, dropping further in the session. GBPUSD started the day at 1.3631 and closed at 1.3606.
GBPEUR also made a loss yesterday. The pair opened at 1.1764 and closed at 1.1752.
EURUSD was able to retreat further on Tuesday, losing 10 pips in the session. The pair started at 1.1587 and closed at 1.1577.
