GBP/USD hit a new four month high last week, and this week's trend needs to be closely monitored with the interest rate decisions of the US and UK central banks
Due to ongoing concerns about a US economic recession, the US dollar experienced fluctuations at the beginning of last week and subsequently hit a several month low.
The market remains concerned that US tariffs and retaliatory measures from other countries may harm the US economy, which in turn exacerbates people's bets on further interest rate cuts by the Federal Reserve.
After lower than expected inflation in the United States, the US dollar rebounded from its lowest level in the second half of last week. Although this usually weakens the US dollar by increasing the Fed's interest rate cut bet, easing inflation has actually eased concerns about economic recession to some extent and helped the US dollar recover some of its losses.
Meanwhile, the pound achieved success last week as it was less affected by global trade war concerns compared to other currencies.
Despite Trump imposing a 25% tariff on all steel and aluminum, including the UK, it is expected that the impact on the UK economy will not be as severe as the US, Australia, Canada, and the EU.
After hitting a four month high against the US dollar, the pound subsequently gave up most of its gains due to the uncertainty of the Bank of England's policy outlook.
In addition, the unexpected contraction of UK GDP in January, announced last weekend, caused the pound to close lower.
Looking ahead, both the Federal Reserve and the Bank of England will make interest rate decisions this week.
Firstly, it is the Federal Reserve, which is expected to maintain interest rates unchanged. Therefore, the focus will be on the central bank's forward guidance, including interest rates and economic forecasts.
If the Federal Reserve expresses concerns about the impact of tariffs on the US economy and suggests that it may lower interest rates faster in the event of a slowdown in economic growth, the US dollar may fall. On the contrary, if the central bank suggests that tariffs may push up inflation, the US economy may remain strong in the long run, and the US dollar may rise.
At the same time, the Bank of England will also keep interest rates unchanged. But after the pessimistic GDP data was released last Friday, the possibility of the central bank cutting interest rates is minimal. Cutting interest rates may lead to a decline in the pound, while if the Bank of England maintains interest rates as expected, the pound may remain stable.
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