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According to related letters, the United States will provide $206 million in funding to the peacekeeping force in Gaza.On August 20th, the Federal Reserve meeting minutes revealed that Fed staff expect overall inflation to decline in the second half of this year, primarily due to a projected decrease in retail gasoline prices, while core inflation is expected to slow slightly. Real GDP growth is projected to be slightly above potential growth next year, with financial conditions and AI-related investments providing support. The unemployment rate is expected to remain close to the Fed staffs long-term equilibrium level this year, decline slightly next year, and fall slightly below the long-term equilibrium level by 2028. Compared to the forecasts at the June meeting, the Fed staffs outlook on economic activity this time is slightly weaker, mainly due to recent data falling short of previous expectations. The Fed staff still believe that their economic forecasts face significant uncertainty due to ongoing geopolitical uncertainties and the unclear economic impact of AI investment and applications. Overall, the risks to the employment and real GDP growth forecasts are skewed to the downside. The risks to the inflation forecasts are skewed to the upside, one risk being that inflation may be more persistent and longer-lasting than the Fed staff anticipates.On August 20th, the Federal Reserve meeting minutes mentioned that, in discussing financial stability, some participants focused on the vulnerabilities associated with financing the rapid expansion of artificial intelligence (AI) infrastructure. These participants noted that the high stock valuations of AI-related companies reflect market optimism about the industrys long-term profit prospects. They observed that a significant downward revision of these companies profit prospects could trigger a broad repricing of asset prices, leading to tighter financial conditions and putting pressure on financial institutions directly or indirectly exposed to the industry. Furthermore, two participants discussed the potential adverse effects of increased volatility in the U.S. Treasury market on the financial system and how to mitigate the likelihood of such events.Market news: AI chip startup Fractile will sell chips worth approximately $250 million to Anthropic. Upon completion of the transaction, Fractile plans to seek a valuation of approximately $6.5 billion.August 20th - The Federal Reserve meeting minutes mentioned that regarding the outlook for monetary policy, participants reiterated that the interpretation of new data would be a key part of their policy deliberations. Many participants believed that if inflation failed to fall, policy tightening might be necessary. Some participants noted that current financial conditions might not be sufficient to push inflation back to 2%. Several participants stated that financial conditions tightened between the two meetings; this change partly reflected strong economic growth and market expectations that the Committee would soon adopt a more restrictive policy stance. A minority of participants who supported raising the target range for the federal funds rate at this meeting believed that this would help avoid having to take larger and potentially more costly tightening measures in the future.

GBP/USD falls to around 1.2370 as the BoE considers taking swift action ahead of UK inflation and US purchasing managers' indices

Alina Haynes

Apr 17, 2023 13:53

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On Monday morning, the GBP/USD currency pair retested an intraday low of 1.2390 after extending Sunday's decline from a 10-month high. To provoke adverse after breaking a four-week uptrend, the Cable pair explains the most recent concerns emanating from the United Kingdom (UK) and the optimism surrounding the Federal Reserve (Fed).

 

According to the Financial Times (FT), "The Bank of England is considering a major overhaul of its deposit guarantee scheme, including increasing the amount covered for businesses and compelling banks to pre-fund the system to a greater extent to ensure faster access to cash when a lender collapses."  The revelation fuels banking concerns in the United Kingdom and places pressure on the Cable duo.

 

UK Chancellor Jeremy Hunt's concerns about US subsidies may also be exerting downward pressure on the GBP/USD exchange rate as British firms rush to claim benefits before leaving the country. According to the news, "Chancellor Jeremy Hunt warned Sky News that Britain should be wary of any new subsidies, warning that they could undermine the economy and possibly even spark a protectionist trade war."

 

A larger-than-expected decline in US retail sales was unable to offset positive data from US industrial production and the University of Michigan's (UoM) consumer confidence index from the previous day. Despite this, US retail sales decreased by 1.0% in March compared to the predicted -0.4% decline and February's -0.2% decline. As opposed to the 0.2% market consensus and previous reading, Industrial Production increased by 0.4% in the month in question. The preliminary result of the University of Michigan's (UoM) Consumer Confidence Index for April, which increased to 63.5 from 62.0 analysts' expectations and previous readings, was also encouraging. In addition, inflation forecasts for the next year increased from 3.6% in March to 4.6% in April, while inflation forecasts for the next five years decreased by 2.9% during the same month.

 

Notably, Fed officials have recently appeared more hawkish than their BoE counterparts, which has exerted additional pressure on the GBP/USD exchange rate.

 

In this environment, the S&P 500 Futures exhibit modest gains following Wall Street's pessimistic close, while bond yields remain unchanged following weekly increases.

 

Moving forward, the current week is crucial for GBP/USD speculators as it contains a variety of high-quality inflation, employment, and UK PMI data. These data may be used to support the Bank of England's (BoE) officials' waning hawkish inclination and may keep bears in play. However, the US PMIs and Fed discussions should not be disregarded when looking for clear guidelines.

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