GBPUSD Trades on Reaction Functions Ahead of Fed and BoE Decisions

The Federal Reserve and the Bank of England will make their interest rate decisions just a day apart in September, but traders are not focusing on who is more hawkish. Instead, they're looking at the trade-off each bank is being asked to make.

GBPUSD has been behaving erratically this year, refusing to follow the usual pattern of moving based on the interest rate differential between the two countries. With both central banks operating in similar policy territory, the yield gap that usually influences the pair's movement has become less decisive.

A reaction function is a rule linking what a bank sees to what it does, and when these functions are similar but opposite, it can be difficult for traders to know which way to go. The market is looking at how each bank weighs inflation against growth from a different starting point.