Pound to US Dollar Exchange Rate Forecast: GBP/USD Could Rebound Higher if BoE Officials Show Hawkishness

Update: Pound to US Dollar Exchange Rate Rebounds from Worst Levels as US Data Disappoints

After spending most of Monday morning sliding, the Pound to US Dollar (GBP/USD) exchange rate edged higher in the afternoon.

US Dollar (USD) investors were disappointed in the latest US Chicago Fed national activity index data, which unexpectedly plunged from 0.98 to just 0.10.

The figure was forecast to come in at 0.27. The lower than expected figure caused concern that economic activity and inflationary pressures were lower than expected.

Still, as Bank of England (BoE) uncertainty remained the Pound’s (GBP) recovery was limited.

Pound investors are anticipating more signals from Bank of England officials, with BoE Deputy Sam Wood due to hold a speech on Tuesday.

Pound to US Dollar (GBP/USD) Exchange Rate Recovery Limited with Both Currencies Modestly Stronger on Mixed BoE Signals

Despite only modest strength in the US Dollar (USD) lately, the Pound to US Dollar (GBP/USD) exchange rate saw major losses last week as Bank of England (BoE) interest rate hike bets fell and dragged heavily on the Pound (GBP).

With investors doubting the likelihood of a May interest rate hike from the BoE, GBP/USD shed over two cents last week and the interbank level fell from 1.42 to 1.40. GBP/USD even briefly touched on a monthly low of 1.39 this morning.

On Monday the GBP/USD exchange rate’s movements was limited, as Sterling was supported by a bullish UK outlook from forecaster group EY Item Club.

However, the Pound was unable to sustain gains against the US Dollar as the US currency was supported by strong US bond yields have been surging in recent sessions.

Pound (GBP) Exchange Rates Struggle to Hold as Bank of England (BoE) Rate Hike Bets Fall

Last week, the Pound (GBP) saw broad losses as investors reacted to an underwhelming UK inflation report – followed by perceived dovishness from Bank of England (BoE) Governor Mark Carney.

A May interest rate hike, previously widely priced in by investors and seen as almost certain, suddenly became a major short-term uncertainty, and BoE interest rate hike bets plunged accordingly.

This uncertainty continued to weigh heavily on the Pound on Monday, despite a relatively optimistic forecast from the EY Item Club.

The group claimed that a tight UK labour market and improving wages would still likely pressure the Bank of England to hike UK interest rates as many as two times in 2018, and a further two times in 2019.

While two rate hikes from the BoE could prove a risk that may put pressure on consumers, economists from the EY Item Club believed that consumers were in a better position to cope with higher rates this year.

UK interest rates are currently on hold at 0.50%, with any rate hike likely to take them to 0.75%.

US Dollar (USD) Exchange Rates Sturdy as T-Bill Yields Rise

US Treasury 10-year bond yields have been hitting the headlines in recent sessions, with the yields seeing significant gains.

Market jitters about inflationary pressures and hopes that trade relations between the US and China can improve have made the 10-year bond yields appealing, which has also strengthened USD.

On Monday, analysts noted that the bond yield was nearing 3% for the first time since January 2014.

This news helped the US Dollar (USD) to hold last week’s gains against the Pound and indicated that investors were also becoming more optimistic about the likelihood of a hawkish Federal Reserve this year.

Pound to US Dollar (GBP/USD) Forecast: Growth Projections in Focus This Week

The current downside pressure on the Pound to US Dollar (GBP/USD) exchange rate could persist until there are economic developments that change the market outlook on the currencies.

A shift in GBP/USD movement is especially likely if central bank speculation is influenced, for example by key UK data causing Bank of England (BoE) interest rate hike bets to rise again.

While Tuesday’s US new home sales and Thursday’s US durable goods orders results could influence US Dollar (USD) trade, the US currency is more likely to be inspired by political developments or Friday’s key data.

UK and US Gross Domestic Product (GDP) projections for Q1 2018 will be published on Friday and are likely to be this week’s most influential ecostats for GBP/USD traders.

If UK growth comes in better than expected, for example, investors may become more confident again that the Bank of England could hike interest rates in May.

Of course, rising US bond yields and a strong US growth report could also make the US Dollar even stronger. As a result, the outlook for the Pound to US Dollar (GBP/USD) exchange rate is still cloudy this week.

Laura Parsons

Laura has been working in the financial services sector since 2012 and provides currency news updates for a number of online and print publications. Over the years she has produced exchange rate analysis for publishers like French Property News, The Express, The Telegraph and Forbes.

Contact Laura Parsons