Dovish tone expected from Bank of England, ADP private payroll for US disappoints in January
As we edge closer to the eagerly awaited Central Bank meetings, and Thursday's anticipated interest rate hike at the Bank of England, there is wideset expectation for a 'dovish' decision and rhetoric from Andrew Bailey and broader investor negativity, in relation to expectations for UK economic underperformance.
The Bank is expected by markets to raise interest rates by 50 basis points, but expectations for a 25bp have risen amidst fresh signs the UK economy is slowing under the weight of previous rate hikes.
A 50bp hike remains a base case expectation for investors, however, the pound could fall based on the guidance given by governor Bailey on future interest rate developments. The biggest risk event for GBP over the coming months is when the Bank of England calls time on the tightening cycle which has been implemented since early 2022. Expectations are for a 50 bps hike this week and then a 25bps hike to follow in March before the BoE conclude the cycle at 4.25%.
The US central bank is widely expected to hike interest rates by 25 bps amid signs of easing inflationary pressures. The bets were cemented by the US wage growth data released on Tuesday, which showed that labour costs increased less than expected in the fourth quarter.
Policymakers have been stressing the need to keep rates higher for longer in order to bring down inflation. This, in turn, suggests that the Fed is still going to sound hawkish, which, in turn, lends some support to the US Dollar and acts as a headwind for the GBP/USD pair.
Hence, investors will look to the accompanying monetary policy statement and Fed Chair Jerome Powell's remarks at the post-meeting press conference for clues about the rate-hike path going forward. This will play a key role in influencing the USD price dynamics and provide some meaningful impetus to the GBP/USD pair.
This afternoon saw data from the US announce that job creation in the private sector plunged in January. The weather-related issues are reportedly key to this, having sent workers to the side-lines, payroll processing firm ADP reported.
Companies added just 106,000 new workers for the month, down from an upwardly revised 253,000 the month before. Economists surveyed by Dow Jones had been looking for a gain of 190,000.
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