British Pound extends losses as US Dollar strengthens; focus turns to the Fed

• Below 1.3350: GBP/USD retreats from last week's highs near 1.3420.
• Ahead of the Fed's decision, reduced USD short positions lift the US Dollar slightly in quiet trading.
• An early-November BoE rate hike is widely anticipated, likely cushioning Pound declines.
  

GBP/USD touches Monday's session lows just below 1.3350. The pair stands about 0.5% below last week's peak of 1.3419. The British Pound (GBP) is extending its retreat from last week's five-week highs against the US Dollar (USD), with investors reducing USD short positions before the Federal Reserve’s (Fed) monetary policy meeting on Wednesday.

With monetary policy decisions from the Fed and other central banks scheduled for later this week, traders remain on the sidelines and market volatility is relatively subdued. The US Dollar is trading somewhat more firmly than in previous weeks.

November rate outlook: Fed-BoE divergence supports the Pound

An unchanged monetary policy stance is widely anticipated from the US central bank on Wednesday. Before tightening further, Fed policymakers have called for more time to evaluate the effects of September’s rate hike. Investors have consequently abandoned expectations of consecutive interest rate increases.

For December, however, expectations of a hike remain strong: futures markets assign an 80% probability to an increase of at least a quarter-point. Thursday’s release of September’s Personal Consumption Expenditures (PCE) Price Index is therefore likely to draw close attention from traders seeking confirmation of those expectations.

A 25-basis-point rate increase is almost fully priced in ahead of next week’s Bank of England (BoE) meeting. Recent macroeconomic releases offer ideal conditions for some monetary tightening, particularly the unexpected growth in Gross Domestic Product (GDP) and September’s higher-than-expected Consumer Price Index (CPI). This is likely to constrain further Pound declines.

Describing GBP/USD as “off five-week highs but up 0.5% this week after 0.7% last week, atypical path pre-budget,” analysts at Societe Generale also observe that a “BoE rate increase [is] nailed on in November,”

In a note, the bank says: “The brace of upside surprises for CPI and PPI output price inflation, and firmer wage data (...) will alert the MPC to the budding risk of second-round effects and will almost certainly trigger a hawkish response on interest rates the next meeting in two weeks.”