GBP/USD Correcting ECB Selloff As BoE Policy In Focus Again

At 1.3069, the GBP/USD pair is attempting to correct the London sell-off that followed the European Central Bank announcements that sank the Euro and enabled the embattled US dollar to bounce back. The pound was caught up in the flows and extended a fall from a high of 1.3146 to a low of 1.3032 on the day.

The Bank of England already faced a tough decision at its next meeting on 5 May. How to quell inflation without scuppering the UK economy? GDP, employment, and inflation data this week just made the BoE’s job a whole lot harder. That’s potential bad news for GBP/USD, which rode high on a hawkish BoE at the turn of this year. Meanwhile, the US Federal Reserve is now steadfast in its commitment to raise interest rates in the face of high inflation.

The Euro plunged to a two-year low against the greenback following comments from ECB President Christine Lagarde that have been taken as a signal to markets that there will be no hurry to raise interest rates. However, the ECB said it plans to cut bond purchases this quarter, then end them at some point in the third quarter.

The dollar index (DXY) rose to a fresh cycle high of 100.761 with the Euro falling to a low of 1.0757. The US benchmark 10-year yield has scored highs of 2.833%, currently 4.55% higher on the day following two days of declines.

The US Federal Reserve is expected to be raising interest rates by a half percentage point at its next meeting in May, and New York Fed President John Williams advocated this again on Thursday, in a further sign even more cautious policymakers at the central bank are on board with a bigger rate hike.

BoE moving back into focus
Sentiment around the Bank of England has taken a back seat of late, with no BoE speakers this week, but at the March meeting, the BoE changed its tone from being very hawkish to being more cautious. Traders could see some more interest in the pound as they head closer to the May BoE meeting with speakers slated for next week. This in particular holds as with the next 25bps hike the BoE will reach the critical 1 % trigger to ponder quantitative tightening.

Governor Bailey speaks twice on the economy, with both providing a strong platform to discuss his dovish views on the BoE’s policy stance. Thursday’s discussion at PIIE is likely to be the most important, analysts at Td Securities said. ”He’ll address inflation on an IMF panel on Friday as well. External MPC member Mann speaks on decision-making under uncertainty earlier Thursday as well.”

There will also be key data with the UK PMIs. The analysts said that they look for a decline in the UK PMIs in April, and for the manufacturing index to fall to a 21-month low while the services index likely reversed last month’s upward revision. Price pressures and lower sentiment will likely weigh on the two sectors, but the return to offices and further pickup in services consumption should offer some support to the services index.

Everything was different prior to the BoE’s March meeting. One of the first major central banks to begin raising interest rates in December of last year, the BoE was expected to keep better pace with the Fed in terms of policy tightening.

A 15 bps points rise in December, followed by a 25 bps in February and March. Voting patterns in February pointed to the prospect of 50 bps clips at one stage, before a more cautious BoE in March brought down future expectations of interest rate hikes.