Pound to US Dollar Rate Loses Gains on Bank of England Developments

Pound to US Dollar Exchange Rate Slides from Weekly Highs after Bank of England (BoE) Decision

Update: The Pound Sterling to US Dollar (GBP/USD) exchange rate has put in strong gains since yesterday in reaction to the Federal Reserve’s more dovish tone on US monetary policy.

However, today’s Bank of England (BoE) policy decision left the Pound (GBP) less appealing and the pair was sliding again in the early afternoon.

The Bank of England indicated that UK interest rates were likely to rise in the coming year, but also cut its Q2 growth rate forecasts to 0.0%. This put fresh pressure on the Pound.

Pound to US Dollar Exchange Rate Continues to Recover from Multi-Month-Low

After hitting its worst levels in months earlier in the week, the Pound Sterling to US Dollar (GBP/USD) exchange rate has seen a strong rebound in response to the Federal Reserve adopting a more dovish stance yesterday.

GBP/USD saw a solid recovery and is trending near $1.27 at the time of writing after rebounding from Tuesday’s low of $1.25.

However, while GBP/USD has recovered much of the losses seen last week, the pairing is still below last week’s opening levels.

The Pound (GBP) has been unable to capitalise on US Dollar (USD) weakness as the ongoing UK Conservative Party leadership contest leaves investors anxious about Brexit.

Pound (GBP) Exchange Rates Climbing Ahead of Bank of England (BoE) Decision

While investors remain hesitant to buy the Pound (GBP) amid speculation that Britain’s next Prime Minister could favour a no-deal Brexit, the Pound has still benefitted from this week’s Central Bank speculation.

With the Federal Reserve now expected to cut US interest rates at least once before the end of 2019, and expectations of a European Central Bank (ECB) interest rate cut over the next year, the Pound is more appealing.

The Bank of England’s (BoE) monetary policy bias is still hindered by Brexit uncertainty, but the bank is generally perceived as more likely to be hawkish than dovish.

According to Lee Hardman, Currency Strategist at MUFG London:

‘The ECB was dovish yesterday and the expectation is the Fed will also be dovish while the BOE is still expected to sound relatively hawkish,

That divergence is possibly offering some near-term support for (the) Pound.’

The BoE has continued to indicate that rates could rise more than markets expect.

US Dollar (USD) Exchange Rates Tumble as Investors Price in Federal Reserve Interest Rate Cut

Yesterday evening, the Federal Reserve held its June monetary policy decision – the most anticipated event of the week for forex markets.

As expected, the Fed left monetary policy unchanged. However, in reaction to the recent slowdown in US economic activity the bank signalled that it may need to cut interest rates.

St. Louis Federal Reserve President James Bullard notably dissented on the decision to leave policy frozen, arguing that rates should be cut immediately.

This, as well as the bank’s more dovish signals, left investors betting that the bank would cut interest rates in July, with some betting that it could be a large 50 basis point cut.

According to Daisuke Karakama, Chief Market Economist at Mizuho Bank:

‘Even though the market had anticipated much of what the Fed said, the Dollar’s fall was still a relatively large one,

The main question is no longer if the Fed will cut rates in July, but whether the easing will be by 25 or 50 basis points.’

Pound to US Dollar (GBP/USD) Exchange Rate Could Rise if Bank of England (BoE) is Hawkish

Pound (GBP) movement is likely to remain generally focused on the Conservative Party leadership contest, but the Pound to US Dollar (GBP/USD) exchange rate could still be influenced by today’s BoE policy decision.

As other major central banks have recently taken a more dovish stance, the Pound could see stronger demand if the BoE defies the trend and remains relatively hawkish.

Of course, if the bank surprises investors by indicating that Brexit and economic uncertainties have made the outlook more dovish, the Pound could quickly shed some of this week’s gains.

The US Dollar (USD), is still reeling from last night’s Federal Reserve policy decision, and could be in for further losses if upcoming US data continues to disappoint.

Investors will be keeping an eye on today’s US manufacturing data from the Philadelphia Fed, and tomorrow’s US PMI projections for June from Markit.

The next big event for the Pound to US Dollar (GBP/USD) exchange rate though, will be next week’s US durable goods orders data.

Josh Jeffery

Contact Josh Jeffery