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Forex Market: GBP/USD hits a fresh three-month high ahead of FOMC meeting, yield curve control speculation pressures dollar

GBP/USD continued on its way up for a tenth straight trading day on Wednesday, touching fresh three-month highs, mostly on the back of weaker US Dollar ahead of the outcome of the Federal Reserve’s two-day policy meeting later today.

The dollar was under pressure stemming from speculation the bank could announce further steps in response to the recent surge in US government bond yields to nearly three-month highs. According to some experts, those measures may include the adoption of yield curve control to push bond yields lower.

Meanwhile, headwinds for the Sterling persisted, with the most pronounced one being Brexit uncertainty. The latest round of negotiations over a future trade deal between the EU and the UK showed little progress.

“Without such an agreement, trade would then be conducted according to WTO rules from next year onwards, which would be a bitter blow for both sides in real economic terms, but above all for the British economy, for which the EU is by far the largest trading partner,” Thu Lan Nguyen, forex analyst at Commerzbank, said.

“Until now, the market probably assumed that the British government under Prime Minister Boris Johnson was only bluffing,” according to Nguyen, but however, she believes that “the market is no longer certain that British politicians will indeed prevent a no-deal Brexit at any price.”

As of 11:48 GMT on Wednesday GBP/USD was gaining 0.46% to trade at 1.2786, after earlier touching an intraday high of 1.2792, or a level not seen since March 12th (1.2849). The major pair has appreciated 0.93% so far this week, following last week’s biggest gain since late March.

On today’s macroeconomic front, at 12:30 GMT the Bureau of Labor Statistics is to report on US consumer prices. The annualized consumer inflation in the country probably decelerated to 0.2% in May, according to market expectations, from 0.3% in April. The latter has been the lowest annual inflation since October 2015, as gasoline prices plummeted 32% year-on-year.

The annualized core consumer inflation, which is stripped of prices of food and energy, is expected to slow down to 1.3% in May from 1.4% in April. The latter has been the lowest core inflation since April 2011.

At 18:00 GMT the Federal Reserve is scheduled to announce its decision on monetary policy. The Federal Open Market Committee (FOMC) will probably keep the target range for the federal funds rate intact between 0% and 0.25% at its two-day policy meeting, scheduled to be concluded today, according to market expectations.

On Monday the bank’s Main Street Lending Program was expanded, so that more small and medium-sized businesses affected by the coronavirus pandemic can take advantage of it. The minimum loan size for certain loans was reduced to $250,000 from $500,000, the maximum loan size for all facilities was increased as well as the term of each loan option – from 4 to 5 years. The program aims to purchase 95% of each eligible loan submitted, while the bank aims to include loans for nonprofit organizations as well.

The policy decision will be followed by a press conference with Fed Chair Jerome Powell at 18:30 GMT. The Fed Chair had said the bank was strongly committed to use the full range of tools in support of the economy due to the unprecedented nature of the coronavirus crisis.

The bank is also expected to publish its first economic projections since the COVID-19 pandemic triggered a recession in February.

Bond Yield Spread

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, equaled 22.4 basis points (0.224%) as of 10:15 GMT on Wednesday, up from 19.6 basis points on June 9th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.2701
R1 – 1.2784
R2 – 1.2839
R3 – 1.2921
R4 – 1.3004

S1 – 1.2646
S2 – 1.2563
S3 – 1.2508
S4 – 1.2453 is a financial media specialized in providing daily news and education covering Forex, equities and commodities. Our academies for traders cover Forex, Price Action and Social Trading.

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