This week the BoE and the Federal Reserve both met and both had divergent views on the terminal rate for each country.
The Fed hiked by 75bps as expected, but Jerome Powell signaled that the terminal rate (the ultimate high level of rates the Fed is heading to) would have to increase. This supported the USD as higher interest rates support a domestic country’s currency strength.
In contrast, the Bank of England stated that it may hike rates to a lower level than the market is currently pricing. This was in part due to the UK’s Energy Price Guarantee which the BoE projects to reduce inflationary pressures in the UK. UK Inflation is now expected to peak in early 2023 and return to 2% within 2 years. The UK also awaits a budget announcement on 17 November which is expected to crimp UK demand as taxes increase to plug the gap for public borrowing.
This divergence should favour GBPUSD selling in the near term with a divergence in the central banks’ views on their terminal rates.
Major Trade Risks: The major risk here is if economic data changes the potential outlook for either the BoE or the Federal Reserve.