Pound Exchange Rates Met by Losses as BoE Leaves Rates on Hold, USD Muted as Inflation Misses
At the time of writing the GBP/EUR exchange rate has fallen around 0.8%, while the GBP/USD exchange rate is largely unchanged following the release of the latest US CPI figures.
GBP/EUR, GBP/USD Exchange Rates Slump in Wake of BoE Rate Decision
The Pound Sterling (GBP) exchange rate tumbled against the majority of its peers on Thursday as the Bank of England left its monetary policy unchanged in May.
The Bank’s Monetary Policy Committee (MPC) voted 7-2 in favour of leaving interest rates on hold at 0.5%
This was a major reversal from the outlook less than a month ago, when it was overwhelmingly thought that the bank was on track for a rate rise in May, and prompted a sharp downturn in the GBP/EUR and GBP/USD exchange rates.
The decision to leave rates on hold reflected the UK’s recent run of softer-than-expected economic data as well as some disappointing GDP figures for the first quarter of the year.
This underwhelming start to 2018 also saw the BoE make some revisions to its growth forecasts for the year, with the bank now expecting the UK economy to expand 1.4% in 2018, rather than the 1.8% growth it had forecast back in February.
The question for GBP investors will now be on whether they can still expect a rate hike at some point later in the year.
While the bank appears open to a rate hike in the coming months, it reiterated that this would be reliant upon economic data moving broadly in line with its expectations.
The minutes from the meeting read:
‘The Committee’s best collective judgement therefore remains that … an ongoing tightening of monetary policy over the forecast period would be appropriate.
However, that judgement relies on the economic data evolving broadly in line with the Committee’s projections.’
US Dollar (USD) Exchange Rate Gains Undercut by US Inflation Figures
Meanwhile, while the US Dollar (USD) initially rose against the Pound (GBP) in the wake of the BoE’s policy meeting, the USD exchange rate was forced to relinquish these gains following the release of the latest US inflation figures.
With headline inflation being shown to have risen in line with expectations last month, the focus for investors was mostly on the core figures, with underlying inflation holding at 2.1% in April.
Markets suggest that this will not be enough to spur the Federal Reserve into accelerating its monetary tightening this year, leading some analysts to suggest the US Dollar’s recent surge could have finally run out of steam.
Pound (GBP) Exchange Rate Forecast: Can UK Labour Figures Help to Revive Faith in Sterling?
With the BoE’s policy statement regarding the need for economic data to pick back up fresh in the minds of investors, attention is likely to turn to the publications of next week’s labour report.
Particular focus will likely be placed on the UK’s latest earning figures, with a possible uptick in wage growth likely to be seen as an indication that the UK economy may begin to pick up steam again in the second quarter.
This will likely reflect well on the Pound (GBP) as it may lead to a pickup in consumer spending and economic growth, which in turn would support the possibility of a rate hike from the BoE in the coming months.