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Apr 02 - 11:55 AM

GBP/USD - COMMENT-Fed-BoE Divergence May Hobble Sterling Even If Losses Are Limited

By Paul Spirgel  —  Apr 02 - 10:10 AM

Even with GBP/USD's slight rise on Tuesday, +0.13% at 1.2564, the pound faces a difficult path to recovery as U.S.-UK rate expectations continue to diverge, with upcoming Fed comments expected to lean on the more hawkish side and BoE expectations more dovish.

With a host of policymakers speaking this week, investors are likely to expect the rhetoric to echo recent comments by Fed Chair Jerome Powell and Governor Christopher Waller, who highlighted that the U.S. central bank is in no rush to cut rates.

Since they spoke last week, futures markets, as indicated by LSEG's IRPR page, have shown a significant drop in Fed June cut expectations to 60% from more than 80% prior to Waller's comments.
Similarly, full-year easing is now seen at -67bp versus -80bp before.

With the BoE seen more dovish after the recent UK CPI and PPI dips -- and thus diverging from the Fed -- the rate outlook should continue to hinder a recovery in the pound.

However, the recent GBP/USD slide from the March 8 high at 1.2894 could plateau around current levels, near cable's 2024 low at 1.2518, as the shift to a more dovish UK rate outlook may have already run its course, and since well-above-target UK inflation might prevent the BoE from engaging in rapid easing.

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Refinitiv IFR Research/Market Commentary


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