Pound Sterling trades in tight range as focus shifts to Fed, BoE monetary policy meetings

• Pound Sterling trades sideways ahead of US, UK central banks’ policy decisions.
• The BoE and the Fed are expected to keep interest rates steady.
• BoE policymakers are expected to offer hawkish guidance amid higher inflation.

The Pound Sterling (GBP) remains lackluster in Monday’s European session as investors appear to have sidelined ahead of the interest rate announcements by the Bank of England (BoE) and the Federal Reserve (Fed). The GBP/USD pair trades in a narrow range near 1.2700 as investors are anticipated to make their bets after this week’s policy announcements. 

Trades see the BoE maintaining interest rates unchanged at 5.25% for the fourth time in a row as core inflation in the United Kingdom more than doubles the desired rate of 2%. Market participants will keenly focus on the interest rate outlook provided by the central bank. 

The first interest rate decision of 2024 is expected to be challenging for BoE policymakers as inflation has proven to be more stubborn than expected and a technical recession is increasingly likely. Consumer spending has been hit hard due to the deepening cost-of-living crisis. Chances of a recession would escalate if the BoE delivers a hawkish guidance.

Daily digest market movers: Pound Sterling struggles for direction

• The Pound Sterling is stuck in a tight range around 1.2700 as investors shift their focus towards the monetary policy announcements by the Federal Reserve and the Bank of England, which are due this week.
• The BoE is widely anticipated to keep interest rates unchanged amid persistent price pressures.
• Interest rates are expected to remain steady at 5.25% for the fourth time in a row. Investors will keenly focus on the guidance on interest rates.
• Unlike the Fed and the European Central Bank (ECB), BoE policymakers have not talked about the timing or scope of rate cuts yet.
• Underlying inflation in the United Kingdom is higher than in the rest of the Group of Seven economies. This will likely allow BoE policymakers to deliver hawkish guidance on the interest rate outlook.
• Discussions among BoE officials will likely remain supportive of keeping interest rates restrictive until policymakers get confident that inflation will return to the 2% target in a sustainable manner.
• BoE policymakers have said rate cuts at the current stage would be “premature” as they could lead to a rebound in price pressures.
• Meanwhile, the US Dollar Index (DXY) struggles for a direction ahead of the Fed’s monetary policy decision and key data such as employment and Manufacturing PMI for January.
• Investors see the Fed maintaining the status-quo for a fourth straight time. The entire focus will be on the timing of when the Fed will start reducing interest rates.
• Fed officials projected a reduction in interest rates by 75 basis points (bps) in 2024. Market participants will focus on how the Fed will fit these three expected rate cuts from or after the March monetary policy meeting.
• Before the Fed’s policy decision, market participants will focus on the JOLTS Job Openings data for December. US employers are expected to have offered 8.75 million jobs in December, slightly lower from the 8.79 million job postings recorded in November.

Technical Analysis: Pound Sterling consolidates near 1.2700