Pound Sterling weakens against US Dollar, investors await FOMC minutes

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The Pound Sterling (GBP) seems fragile near 1.3400 against the US Dollar (USD) during the late European trading session on Wednesday.

The Pound Sterling declines to near 1.3400 against the US Dollar as Greenback’s safe-haven demand has increased.
Ongoing US government shutdown is expected to be a major drag on the US Dollar’s outlook.
Investors await BoE Pill’s speech for fresh cues on the monetary policy outlook.

The Pound Sterling (GBP) seems fragile near 1.3400 against the US Dollar (USD) during the late European trading session on Wednesday. The GBP/USD pair faces selling pressure as the US Dollar (USD) outperforms its major currency peers despite the United States (US) government entering its second week of shutdown.

At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.35% higher to near 99.00, the highest level seen in two months.

The US Dollar has attracted significant bids as recent political developments in Japan and France have increased its safe-haven demand. In Japan, the ruling conservative party has elected Sanae Takaichi as its new leader, who could become the first female Prime Minister (PM) of the country. Her election has dashed hopes of more interest rate hikes by the Bank of Japan (BoJ). Meanwhile, the French economy is facing deeper political crisis following the sudden resignation of PM Sebastien Lecornu.

On the domestic front, ongoing government shutdown is expected to be a major drag on the US Dollar, with US President Donald Trump threatening to cut welfare programs and laying-off federal jobs. Trump warned on Tuesday that the White House could roll back some of its programs, and added that he would provide details on lay-offs in federal agencies in the next four to five days, Reuters reported.

Daily digest market movers: Pound Sterling trades mixed ahead of BoE Pill's speech

The Pound Sterling trades higher against its major currency peers, except North American currencies, on Wednesday. Investors expect the British currency to trade on sidelines amid uncertainty about whether the Bank of England (BoE) will cut interest rates again in the monetary policy meetings remaining this year.
The uncertainty over BoE’s monetary policy outlook has increased as inflationary pressures in the United Kingdom (UK) economy are proving to be persistently higher, while labour demand is slowing.
In September’s monetary policy meeting, the BoE held interest rates steady at 4% and retained its “gradual and careful” monetary easing approach. In Wednesday’s session, investors will focus on BoE Chief Economist Huw Pill’s speech scheduled at 15:00 GMT. Pill was one of seven Monetary Policy Committee (MPC) members, out of nine, who voted to keep interest rates steady.
During the European trading session, the BoE Financial Policy Committee Minutes showed that UK households and businesses remain resilient despite the "higher cost of living and borrowing costs". The minuted also showed that risk managers more confident in the stability of UK financial system in the second-half of the year than they were in the first-half.
In the US, investors will focus on the release of the Federal Open Market Committee (FOMC) minutes for the September policy meeting due at 18:00 GMT. The FOMC Minutes will provide a detailed explanation about its decision to cut interest rates by 25 basis points (bps) to 4.00%-4.25%. This was the first rate cut by the Fed this year.
Fed’s dot plot also showed that policymakers see Federal Funds Rate falling to 3.6% by the year-end, suggesting that there will be two more interest rate cuts this year. The CME FedWatch tool also shows that traders see an 82% chance that the central bank will cut interest rates by 25 basis points (bps) in each of its two policy meetings remaining this year.

Technical Analysis: Pound Sterling strives to hold 1.3400

The Pound Sterling underperforms the US Dollar and drops to near 1.3400 on Wednesday. The GBP/USD pair remains below the 20-day Exponential Moving Average (EMA), which trades around 1.3468, suggesting that the near-term trend is bearish.

The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, indicating a sideways trend.

Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the September 17 high of 1.3726 will act as a key barrier.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.