Pound Sterling trades flat ahead of Fed-BoE policy, UK labor market data

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The Pound Sterling (GBP) trades broadly flat against its major currency peers, consolidating around 1.3350 against the US Dollar (USD) during the European trading session on Wednesday. The British currency struggles for direction as investors have sidelined ahead of a data-packed Thursday.

The Pound Sterling trades calmly as investors await the Fed-BoE policy and the UK employment data.
Both the Fed and the BoE are expected to leave interest rates unchanged.
UK’s Average Earnings Excluding Bonuses is estimated to have cooled down to 4% YoY in the three months ending January.

Investors await the Bank of England’s (BoE) monetary policy announcement, in which it is expected to leave interest rates unchanged at 3.75%, with a 7-2 majority, as inflationary pressures have accelerated globally due to higher oil prices.

Analysts at JP Morgan have forecast that the BoE will remain on pause for the entire year as price pressures in the United Kingdom (UK) region are unlikely to return to the central bank’s 2% target soon.

On Thursday, investors will also focus on the UK labor market data for the three months ending January, which will be released before the monetary policy outcome. The data is expected to show that the ILO Unemployment Rate remained steady at 5.2%, and Average Earnings Excluding Bonuses, a key measure of wage growth, cooled down to 4% Year-on-Year (YoY) from the previous reading of 4.2%.

Meanwhile, the US Dollar also trades flat ahead of the Federal Reserve’s (Fed) interest rate decision at 18:00 GMT. As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat around 99.50.

According to the CME FedWatch tool, traders are confident that the Fed will leave interest rates unchanged in the range of 3.50%-3.75%.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect the Pound?

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.