• GBP/USD is under pressure ahead of both the Fed and Boe this week.
  • Markets could be readjusting their GBP length ahead of an uncertain outcome.

GBP/USD is being pressured at the start of the week, down some 0.3% at the time of writing after sliding from a high of 1.3669 to a low of 1.3608 so far and staying close to a three-week low. Central banks are the focus for the week with uncertainty as to whether the Bank of England will raise interest rates and if the US Federal Reserve will start tapering this month. 

FOMC meeting underway

Firstly, the two-day Federal Open Market Committee meeting kicked off today. The market has positioned for a tapering announcement following guidance from the central bank which has managed expectations perfectly in terms of preparing the markets for what is likely to be speed tapering.  

”Most officials seems to agree that it’s better to get tapering over as quickly as possible in order to leave the Fed maximum flexibility to hike rates when needed,” analysts at Brown Brothers Harriman explained. ”We believe that the most likely path for tapering has already been flagged by the Fed, which would reduce asset purchases by $15 bln per month ($10 bln UST and $5 bln MBS).”

The analysts also believe that the Fed will start tapering this month so that QE effectively ends by mid-2022. The market has taken that process a step further and is pricing in around 50% odds for liftoff in Q2. ”Q3 liftoff is already fully priced in,” they explained, ”followed by another hike fully priced in for Q4. This is much more aggressive than what the Fed itself anticipates, at least in the current Dot Plots. We suspect the Fed will try to push back a bit against such aggressive tightening expectations, but we are not sure that the market will listen.”

Meanwhile, US data will be a key focus this week also. Yesterday, October ISM Manufacturing PMI came in strongly at 60.8 vs. 60.5 expected and 61.1 in September.  Readings above 60 are rare and yet here we are above 60 for 8 of the past 11 months. Looking at the components, employment came in at 52.0 vs. 50.2 in September, which could be symbolic of a healthy Nonfarm Payrolls report at the end of the week where forex volatility could be highest, depending on the outcome.

”Employment component of 52.0 is the highest since July, when 57k manufacturing jobs were added out of 1.09 mln total NFP gain.  All in all, this was a very solid report,” analysts at Brown Brothers Harriman said. ISM services PMI will be reported Wednesday and so too will the ADP jobs report.  The current consensus is 450k and we suspect it will creep higher.  

BoE in focus

Casting minds back, sterling rose to a 20-month high versus the euro in late October and added around 3% for the same month vs the greenback for the same month amid expectations for a BoE interest rate hike. Inflation risks have surged, but there are growing doubts around what the central bank will actually do at its policy meeting on Thursday. Three of the nine Monetary Policy Committee members, including the BoE Governor Andrew Bailey, have been voicing concerns around inflation and the need to act. 

It is a close call whether the Bank of England (BoE) hikes on Thursday or not, so should there be a hike, it could well be a dovish one with the BoE saying that the hiking cycle will be “gradual and limited”. Market pricing is pretty aggressive as it is pricing in a total of 125bp rate hikes until year-end 2022 and hence traders could be rethinking and adjusting some of its lengths into the meeting this week.  

This article was originally published by Fxstreet.com.Read the original article here.