British Pound edges higher above 1.3400 on US-Iran peace optimism
- GBP/USD drifts higher to near 1.3430 in Wednesday’s early Asian session.
- Optimism surrounding a potential US-Iran peace deal supports the British Pound.
- Fed will announce its rate decision on Wednesday, followed by a press conference with new Fed Chairman Kevin Warsh.
The GBP/USD pair gathers strength to around 1.3430 during the early Asian trading hours on Wednesday, bolstered by Middle East peace hopes. Markets might turn cautious later in the day ahead of the UK Consumer Price Index (CPI) inflation data and the US Federal Reserve (Fed) interest rate decision.
Two months of final negotiations will begin immediately after the initial deal between the US and Iran is signed on Friday. US President Donald Trump said the Strait of Hormuz could reopen on Friday, and Washington will allow Iran to immediately start selling oil and fuel again as part of the deal to end the war, per the Wall Street Journal. Hopes of a US-Iran peace deal could underpin the riskier assets, such as the British Pound (GBP) against the US Dollar (USD) in the near term.
The Fed is widely expected to keep its benchmark interest rate steady at its June policy meeting on Wednesday, leaving the federal funds rate in a range of 3.5% to 3.75%. The focus will be on new Fed Chairman Kevin Warsh and the handling of the press conference that follows the central bank's policy statement.
On the UK’s front, the Bank of England (BoE) is set to leave the interest rates unchanged at 3.75% on Thursday as Governor Andrew Bailey judges the UK central bank can take its time to assess if higher energy prices from the Iran war will generate lasting inflation pressure.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Futures markets have previously priced in as many as three rate hikes by the Bank of England (BoE), but now expect no changes because of falling oil prices in June and the expectation of a peace deal in the Middle East, according to Morningstar.