Both the Federal Reserve and the Bank of England (BoE) meet to set monetary policy this week, with the central banks’ forward guidance potentially infusing volatility into currency markets.
At the time of writing, the US dollar (USD) remains under heavy pressure. USD/GBP is at a four-month low, while USD/EUR is at its lowest level in five months. GBP/EUR is trading just above the six-week low struck last week.
What are the Fed and BoE expected to do?
The Fed and the BoE are both expected to leave interest rates unchanged when they conclude their policy meetings on Wednesday evening and Thursday afternoon, respectively.
However, recent trade tensions have added an element of uncertainty to the upcoming decisions, and investors will be poring over the banks’ forward guidance.
The Fed could raise concerns about a US recession, potentially indicating that it might move faster on future rate cuts. Meanwhile, worries about the health of the UK economy have introduced an outside chance of a cut this week.
How could this impact USD and GBP?
We could see the US dollar test new multi-month lows if the Federal Reserve sounds the alarm over a possible US recession, particularly if the bank suggests it might accelerate its rate-cutting cycle in response.
However, if the Fed says that tariffs could push up inflation and sees the US economy rebounding in the second half of the year, USD could attract support.
Likewise, if the BoE expresses concern about the health of the British economy then Sterling could stumble. A surprise cut could lead to even heavier losses for the pound (GBP).
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