GBP/USD nosedives as the divergence between Fed and BOE widens

The GBP/USD price crashed on Thursday as the Bank of England (BOE) and the Federal Reserve diverged on monetary policy. The pair declined to a low of 1.3550, which was the lowest level since October 6. It has declined by more than 2% from its highest level in October. 

Bank of England decision

The GBP/USD crashed hard after the surprising interest rate decision by the BOE. Before the meeting, analysts were expecting that the BOE will hike interest rates and even taper its asset purchases program. 

However, the bank decided to leave interest rate unchanged at 0.10%. 2 of the 9-member committee voted to boost interest rates in the meeting. At the same time, 6 of the 9 members voted to continue with the asset purchases at the current pace. The bank is aiming to buy about 875 billion pounds of government bonds. 

The decision came at a time when the UK economy is doing relatively well. The unemployment rate has declined to about 4.6% while inflation is comfortably above the bank’s target of 2.0%. The recent data showed that inflation rose by about 3.2% in September. Now, the Bank of England expects that the CPI will rise by almost 4%. 

Divergence with the Fed

The GBP/USD pair declined because of the divergence that has emerged between the BOE and the Federal Reserve. 

In its decision on Wednesday, the bank hinted that interest rates will start rising in the coming months. The bank also decided to slash its large quantitative easing program by about $15 billion. This process will continue until the program winds down in 2022.

The next big mover for the GBP/USD will be the upcoming US non-farm payrolls (NFP) data. The numbers are expected to show that the economy created more than 500k jobs last month. At the same time, wages are expected to have risen by about 4.9% while the participation rate increased. Most importantly, analysts expect that the unemployment rate declined to 4.6%.

Recent data have painted a bright picture about the labour market. For example, data by ADP showed that private payrolls increased by 543k in October. At the same time, data by the Bureau of Labour Statistics showed that the number of Americans filing for jobless claims declined to 269k last week. This was better than the expected 275k.

Therefore, the GBP/USD pair will likely maintain a bearish trend as its divergence with the Fed widens.