The British pound rose at the start of the Bank of England's monetary policy week

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The British pound (GBP) outperformed its peers at the start of the week, recovering some of its value against the US dollar (USD) during the European trading session. The GBP/USD pair found temporary support near the 1.3660 level and rose slightly above 1.3700 as the US dollar weakened.

At the time of writing, the US Dollar Index (DXY), which measures the value of the US dollar against six major currencies, was down slightly by 0.1%, nearing 99.00. However, the index remains close to its high of 97.33 reached last week. The US dollar surged on Friday after US President Donald Trump nominated Kevin Warsh to be the next Federal Reserve chair.

The selection of Kevin Warsh to succeed current Federal Reserve Chair Jerome Powell has significantly boosted the appeal of the US dollar, given his historical preference for a strong dollar during his tenure as Fed governor. Market experts believe that interest rate cuts during Warsh's tenure will be slower than those under the other nominees. He is also known for his opposition to quantitative easing on the Federal Reserve's balance sheet during Ben Bernanke's presidency.

The strong recovery of the US dollar has led to a sharp decline in demand for precious metals and risk-sensitive assets.

Meanwhile, expectations for a dovish Federal Reserve meeting in April have risen slightly following Warsh's nomination, according to the CME FedWatch tool.

 

Daily Market Roundup: Bank of England Expected to Keep Interest Rates Steady at 3.75%

  • The British pound is likely to trade cautiously as the Bank of England is set to announce its first monetary policy decision of the year on Thursday. The bank is widely expected to keep interest rates unchanged at 3.75% this week, following a 25 basis point cut at its December policy meeting.
  • On Thursday, investors will also be focused on the Bank of England's Monetary Policy Report for fresh insights into the current economic situation. The central bank is expected to reiterate that monetary policy will continue its gradual downward trend given the weak labor market.
  • The latest UK labor market data for the three months to November showed the unemployment rate holding steady at 5.1%.
  • The GBP/USD pair will also be influenced this week by a series of US employment and purchasing managers' index (PMI) data releases. The most significant will be the January non-farm payrolls report, due on Friday. Investors will be paying close attention to this data for new clues about the Federal Reserve's monetary policy outlook.
  • On Monday, investors will focus on the ISM Manufacturing Purchasing Managers' Index (PMI) for January, due at 3:00 PM GMT. The index is expected to rise to 48.3 from 47.9 in December. While manufacturing activity appears to have improved slightly, it remains in contraction territory. A reading below 50.0 indicates a contraction in business activity.