GBP/USD surges amid speculation of cautious BoE policy

Key points

• GBP/USD reached a high of 1.3212 during Monday’s European session
• The US dollar index reaches lows of 100.70
• Bank of England likely to maintain interest rate at 5.0% in contrast of U.S. rate cuts
• Economic indicators such as inflation and employment figures are crucial
• Market sentiment now favors a 50 bps cut at this week's FOMC meeting

GBP/USD on bullish trend ahead of interest rate decisions

GBP/USD is on the rise during today’s European session, reaching highs of 1.3212 this morning. The pair hasn't reached such a high since September 6th, when it peaked at 1.3238. This bullish trend for the pound is likely attributed to expectations of substantial rate cuts by the US Federal Reserve, a recently weaker US dollar, and predictions of a more cautious policy change approach by the Bank of England this week.

GBP/USD price history

Dollar down while interest rate cut anticipation spikes

Ahead of the Federal Reserve’s rate cut decision on Wednesday, the US dollar index (DXY) is at a 5-day low of 100.70. The dollar is also down against other major pairs, such as USD/JPY, which sunk below 140.000 this morning to 139.888. This decline comes as markets grapple with increased speculation about the Fed's next move. While a 25 basis points (bps) cut was previously the consensus expectation, recent economic data and market sentiment shifts have led to a growing belief that a more aggressive 50 bps cut is now on the table. The potential for a larger rate cut reflects concerns about the slowing economy and the need to provide a stronger stimulus to spur growth. This downtrend also supports the rise of the pound in the GBP/USD pair.

Interest rate expectations for BoE remain steady

Despite the expectations of the Fed to pursue more aggressive rate cuts, the Bank of England is predicted to remain more cautious in their policy change approach. Analysts expect the BoE not to match the Fed’s rate cut decisions, thus maintaining higher interest rate differentials compared to the US dollar. As of this week, the BoE is expected to maintain a consistent interest rate of 5.0% until officials are more certain of a more controlled inflation rate. This steady approach may bolster confidence in the pound's stability.

What’s next for GBP/USD?

The GBP/USD exchange rate appears positioned to continue its upward trajectory in the near term, driven by several significant factors. The anticipation of a more aggressive rate cut by the US Federal Reserve, potentially up to 50 basis points, could further weaken the US dollar, making the GBP more attractive. On the contrary, if the Fed opts for only a 25bps cut and softens their rate cut outlook, the dollar could rebound against the pound. Meanwhile, the Bank of England's cautious approach, likely maintaining interest rates at around 5.0%, creates a favorable interest rate differential for the pound compared to the dollar. Additionally, investors are closely monitoring economic indicators such as inflation rates and employment figures, which heavily influence central bank policy decisions.

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