The GBP/USD currency pair is under selling pressure amid UK economy news. As of writing on Wednesday, it is testing the slightly critical support level of 1.3400. A confluence of recent events has caused this change. The U.S. Federal Reserve’s recent decision to hold interest rates sparked a White-hot rebound of U.S. dollar (Greenback).
Chair Jerome Powell’s hawkish statements at a recent press conference were, by far, the largest drivers of this rebound. Economists have pointed to inflation re-adjusting back to the Fed’s target of 2%. This new development will be a huge driver for upcoming monetary policy decisions. With the strength of the Greenback, currency market dynamics are changing rapidly, creating strong headwinds for the British pound.
The current scenario reflects broader economic trends. The M3/GDP ratio is almost back to where it was going into the pandemic. This appears to be a normalization in monetary aggregates after distortions due to Covid-19. Inflation rates have varied dramatically over the past 20 years. In the 2000s, the typical rate was 1.7% (excluding more erratic components), but fell to just 1.1% in the 2010s.
As GBP/USD continues to weather this stormy environment, gold prices have experienced a significant drop as well. On Wednesday, gold finally gave up the ghost, falling through $3,400 per troy ounce. Chair Powell’s hawkish message was enough to add heavy ballast, turning the tide against all bullish trade in gold. This followed news that the Fed continued its wait-and-see stance at its most recent meeting.
To make matters worse, one of the hardest hit financial instruments by all these changes has been the EUR/USD currency pair. It has declined to fresh daily lows around 1.1460. Technical outlook – Euro losing strength The euro is losing momentum and retreating back towards daily lows. Traders are trying to determine what effect the Fed’s actions will have on European markets.
The European Central Bank (ECB) constantly keeps a watchful eye on monetary aggregates during these fluctuations. The ECB has been vigorously tightening interest rates since 2022. They have been actively shrinking the size of their balance sheet. This proactive approach seeks to mitigate the negative impacts of government debt repurchases that were previously purchased on a massive scale during the pandemic.
“The causes of the rise in the price of all things.” – Jean Bodin
Central banks the world over face big challenges in the current economic landscape. At the same time, they’re grappling with historic inflation and need to tackle its underlying causes. The relationship between monetary policy and inflation is an important subject that has led to heated discussions between economists and policymakers.