British Pound picks up amid peace hopes with central banks coming into focus

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The British Pound (GBP) has drawn support from the US Dollar’s (USD) weakness, amid a brighter market mood on Monday, to hit a fresh 10-day high at 1.3460. The pair, however, remains trapped within the trading range from the last four weeks, as investors' focus shifts to monetary policy.

GBP/USD hits 10-day highs at 1.3460 but remains below monthly highs, above 1.3500.
The US Dollar dropped as reports of a peace deal between the US and Iran boosted risk appetite.
Pound rallies remain limited with the Fed and BoE monetary policy decisions in focus.

Markets have reacted positively to news of a peace agreement between the US and Iran, which would end the 100-day war and allow for the reopening of the Strait of Hormuz. US President Donald Trump affirmed that the agreement will be signed on Friday in Switzerland, although details of the deal are scarce so far.

WTI Oil has dropped to its lowest levels in three months, and US Treasury yields extended their reversal, dragging down the safe-haven US Dollar with them. Riskier perceived assets, like the Pound, have jumped from last week’s closing levels. Cable’s upside attempts, however, remain limited, with all eyes on the Federal Reserve (Fed) and Bank of England’s (BoE) decisions due later in the week.

Fed and BoE decisions coming into focus

The Fed is widely expected to leave its benchmark interest rate on hold on Wednesday. Traders will be looking at the bank’s economic and interest rate projections for changes in the bank’s guidance, and the press conference is likely to be carefully analysed to assess the imprint of the new chairman, Kevin Warsh.

A day later, the Bank of England is also expected to leave interest rates on hold, with the bank’s forward guidance looking increasingly muddy amid high inflation and weakening growth. In this case, the vote split and the minutes of the bank, which will be released immediately, are likely to determine the Pound’s near-term direction.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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