Fed’s stance and BoE’s rate cut expectations impact bond yields and dollar value

In the wake of recent monetary policy meetings, the financial markets have been reacting to the statements made by Federal Reserve Chairman Jerome Powell and the Bank of England (BoE). These reactions have led to significant changes in bond yields and the value of the dollar.

Following the Federal Open Market Committee (FOMC) meeting, markets leaned towards dovish interpretations of Powell’s comments, even as the Federal Reserve maintained a hawkish stance. Despite recognizing robust US economic performance, concerns over tightening financial conditions and questions over the reliability of the dot plot led to a belief that US interest rates may have peaked. This sentiment resulted in a drop in bond yields and a decrease in the value of the dollar.

In contrast, at the BoE meeting, three out of nine members of the monetary policy committee advocated for a 25 basis point hike. However, rising UK unemployment and a zero growth forecast for 2024 present considerable challenges. The rose beyond previous support/resistance levels due to the declining dollar and reduced US yields.

Despite these developments, bullish drivers for Sterling are limited. Interest rate expectations suggest that the BoE will only consider rate cuts in Q3 of next year. This is later than market estimates for the Fed, which are now revised to Q2 2024.

Moving into this week, GBP/USD could face a challenging period if the dollar sell-off pauses. Market participants are expected to closely monitor reactions from Fed officials to the risk-off sentiment and insights from Powell during his two planned appearances this week.

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