Forex Today: BoE is up next as markets digest Fed policy decisions

Here is what you need to know on Thursday, September 19:

Following the wild fluctuations seen in financial markets in the American session on Wednesday, volatility remains high early Thursday. The Bank of England (BoE) will announce monetary policy decisions during the European trading hours. Later in the day, the US economic calendar will feature weekly Initial Jobless Claims, August Existing Home Sales and September Philadelphia Fed Manufacturing Survey data.

Following the two-day policy meeting, the Federal Reserve (Fed) announced that it lowered the policy rate by 50 basis points (bps) to the range of 4.75%-5%. The revised Summary of Economic Projections (SEP), the so-called dot-plot, showed that policymakers foresee two more 25 bps rate reductions in the last two meetings of the year. The immediate reaction to the Fed policy decision triggered a heavy selloff in the US Dollar (USD).

US Dollar PRICE This week

The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the Australian Dollar.

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

In the post-meeting press conference, however, Chairman Jerome Powell reiterated that they remain attentive to the risks on the both sides of the mandate. "If the economy remains solid, we can dial back the pace of cuts; equally, if the labor market deteriorates, we can respond," Powell added. After slumping to its lowest since July 2023 at 100.21, the USD Index staged a rebound and closed the day flat. In the early Asian session, the USD Index extended its recovery toward 101.50 but lost its traction. At the time of press, the index was in negative territory below 101.00. In the meantime, the benchmark 10-year US Treasury bond yield holds steady at around 3.7% after rising more than 1.5% on Wednesday and US stock index futures trade decisively higher after Wall Street's main indexes ended the previous day marginally lower.

The BoE is forecast to maintain the policy rate at 5%. Since there will not be a press conference, investors could react to changes in the policy statement and the vote split. After touching its highest level in over two years near 1.3300, GBP/USD erased a large portion of its daily gains on Wednesday. The pair holds its ground in the European morning on Thursday and trades at around 1.3250.

During the Asian trading hours, the data from Australia showed that the Unemployment Rate was unchanged at 4.2% in August as expected. In this period, the Employment Change was up 47.5K, better than analysts' estimate for an increase of 25K. AUD/USD gathered bullish momentum and climbed to a fresh 2024-high above 0.6800.

EUR/USD spiked toward 1.1200 with the immediate reaction to the Fed but lost its traction to close the day flat. The pair benefits from the renewed selling pressure surrounding the USD and rises toward 1.1150 on Thursday.

USD/JPY advanced to its highest level in nearly two weeks at 143.95 during the Asian trading hours on Thursday but reversed its direction. At the time of press, the pair was virtually unchanged on the day, trading near 142.20.

Gold reached a new all-time high of $2,600 in the American session on Wednesday. Although XAU/USD made a sharp U-turn and ended the day in the red, it started to gather bullish momentum early Thursday. XAU/USD was last seen rising more than 0.7% on the day near $2,580.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect the Pound?

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.