This week, both the Federal Reserve and the Bank of England (BoE) will announce their final interest rate decisions of 2024, with the outcomes likely to infuse the currency market with volatility.
At the time of writing, GBP/EUR is trading just half a cent below the 33-month high hit last week, while GBP/USD has recovered from a two-week low. EUR/USD is one cent above the two-year low struck last month.
What are the Fed and the BoE expected to do?
Markets expect the Federal Reserve to cut US interest rates by 25bps on Wednesday. However, the Fed may also indicate that it will take a more cautious approach to rate cuts in 2025, with signs of a strong US economy and the incoming Trump administration creating uncertainty over the inflation outlook.
Meanwhile, the Bank of England is broadly expected to leave interest rates unchanged on Thursday, particularly after this morning’s strong wage growth data.
How could the decisions impact USD and GBP?
If the Fed delivers a hawkish cut and signals a slower pace of policy easing next year, the US dollar could rally. However, a more dovish tone from the US central bank would likely see USD face selling pressure.
Across the Atlantic, the pound is poised to strengthen if the BoE leaves rates unchanged and expresses concern about the persistence of underlying inflation. Conversely, a shock rate cut could send the pound plummeting.
In the meantime, the UK consumer price index on Wednesday morning could impact GBP. An expected rise in inflation may cement bets for a BoE rate hold and likely boost Sterling. If inflation undershoots, the outside chance of a rate cut could pressure the pound.
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