Can the British Pound consolidate above 1.3400 as the US Dollar weakens?

Holding above 1.3400, GBP/USD is poised for a 1.4% gain over the past two weeks.
A pause by the Fed next week and a BoE rate increase in early November are in focus for markets.
Uncertainty over how far the Fed will tighten policy keeps the US Dollar under pressure.

Sterling's advance against a softer US Dollar (USD) continues on Thursday, with GBP/USD trading at one-month highs just above 1.3400 and set for a 1.4% gain over the past two weeks. Supporting the British Pound (GBP) is a backdrop in which conditions in the UK favour a Bank of England (BoE) rate increase in November, while markets await next week's Federal Reserve (Fed) policy decision.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Pressure on the BoE to raise borrowing costs increased after Wednesday's UK data confirmed that elevated energy prices are pushing up consumer inflation. Meanwhile, last week's UK Gross Domestic Product (GDP) figures showed continued economic growth, making the decision easier for policymakers at their 5 November meeting.

Further indications of the outlook for the next monetary policy meeting may come later in the day from BoE Governor Andrew Bailey. He is expected to address central bank independence at the Official Monetary and Financial Institutions Forum (OMFIF).

How far will Fed tightening go as the US Dollar remains under pressure?

Lower US Treasury yields continue to weigh on the US Dollar. Following dovishly inclined remarks from Fed officials, investors regard an interest rate increase at next week's meeting as unlikely and are assessing how far the tightening cycle could extend.

In a cautious message last week, Fed Chair Warsh declined to prejudge the October and December meetings. Other Government Board members sought additional time to evaluate the effects of September's rate increase before raising borrowing costs again.

A bullish view on the Pound is maintained by analysts at ING. In a note, the Dutch bank says: “Greater market confidence in a Bank of England tightening cycle – we look for 25bp hikes in February and November – makes sterling a high-carry European currency,”

Central banks: frequently asked questions

What role does a central bank play?

Maintaining price stability within a country or region is a central bank's core mandate. As the prices of goods and services fluctuate, economies face inflation or deflation: a sustained increase in the price of the same goods represents inflation, while a sustained decline represents deflation. By adjusting its policy rate, the central bank seeks to keep demand in check. Major central banks, including the US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE), are mandated to maintain inflation close to 2%.

How does a central bank respond when inflation falls below or rises above its projected target?

Adjusting the benchmark policy rate, commonly called the interest rate, is a key tool available to a central bank for raising or lowering inflation. At previously announced times, it publishes a statement setting out the policy rate and explaining why it has been held steady, reduced or increased. Domestic banks then revise their deposit and lending rates accordingly. These changes affect how easily people can earn returns on savings and how readily companies can borrow to invest in their businesses. Substantial interest rate increases by a central bank are known as monetary tightening; reductions in its benchmark rate are described as monetary easing.

Who sets interest rates and determines monetary policy?

Political independence is common among central banks. Before taking a seat on a central bank's policy board, prospective members undergo a series of panels and hearings. Board members typically hold individual views on how inflation should be managed and what monetary policy should follow. Those favouring very accommodative policy, low interest rates and inexpensive credit to give the economy a substantial boost, while accepting inflation slightly above 2%, are known as ‘doves’. By contrast, ‘hawks’ prefer higher rates to reward savers and seek to keep inflation under control at all times, remaining focused on bringing it to 2% or just below.

Who heads a central bank and chairs its meetings?

A chairman or president usually presides over each meeting and works to build agreement between hawks and doves. If votes are evenly divided on whether to change the current policy, the chair has the final say to prevent a 50-50 tie. Speeches by the chair, often available to follow live, communicate the current policy stance and outlook. Central banks aim to implement monetary policy without provoking sharp swings in interest rates, equities or their currencies. Ahead of a policy meeting, all members convey their views to markets. However, public remarks are prohibited from a few days before the meeting until the new policy has been announced. This interval is known as the blackout period.