Synopsis:

HSBC analyzes the impact of the upcoming FOMC and BoE policy meetings on GBP/USD, highlighting potential reactions to Fed rate cuts and the current state of the UK labor market.

Key Points:

1. Immediate Reaction to Fed Decisions:

   • A 25bp rate cut by the Fed could lead to a decline in GBP/USD.
   • Conversely, a 50bp cut may initially boost GBP/USD, but such gains could be short-lived.

2. UK Labor Market Trends:

   • The UK labor market shows signs of cooling, with the unemployment rate rising to 4.1% in July from 3.8% in November.
   • Forward-looking indicators suggest potential job losses ahead, raising concerns about future economic performance.

3. BoE Caution and Inflation:

   • Some members of the MPC express caution regarding easing due to persistent services inflation and wages growth.
   • However, services CPI is expected to decline more rapidly than the BoE's forecasts, indicating a potential easing of inflation pressures.

4. Market Focus Shift:

   • While Fed policy will dictate GBP/USD direction this week, markets are likely to pivot towards UK economic fundamentals and the potential dovish stance of the BoE in the near future.

Conclusion:

HSBC anticipates that the outcome of the FOMC meeting will influence GBP/USD in the short term, but the evolving economic landscape in the UK, particularly regarding labor market trends and BoE policy, will become increasingly significant in shaping market sentiment.