BoE Boosts the Pound US Dollar (GBP/USD) Exchange Rate

Pound Sterling US Dollar (GBP/USD) Exchange Rate Rises on More Optimistic BoE Economic Forecasts

The Pound Sterling US Dollar (GBP/USD) exchange rate rose by around 0.4% on Thursday morning. This left the pairing trading at around $1.3171.

The Pound was able to make gains this morning following the latest Bank of England (BoE) monetary policy meeting.

The bank noted that it would take longer for Britain’s economy to return to pre-coronavirus levels. This would likely be around the end of next year.

Although, the BoE’s predictions were not as grim as those from just a few months ago which boosted GBP.

The economy is expected to contract by -9.5% this year, which would make this the worst performance in 99 years.

However, this is more optimistic than May’s prediction of a -14% slump. This would have been the worst contraction in more than 300 years.

While the BoE expects the slump to be less severe, policymakers believe the country’s unemployment rate will double.

Unemployment is expected to peak at around 7.5% at the end of 2020. Although, this offered some support as it was lower than the earlier estimate of 10%.

In the bank’s Monetary Policy report the BoE said:

‘In the MPC’s projections, unemployment rises to around 7.5% by the end of the year as some workers are made redundant and hiring remains subdued.

‘That would represent around 2½ million people out of work and searching for jobs, the highest total since 2013, and a clear sign of spare capacity in the economy.’

US Dollar’s (USD) Downward Trend to Continue into 2021

The US Dollar continued its decline on Thursday and markets expect the current downward trend to continue into the next year. This is due to expectations that the recovery from the coronavirus crisis is flagging in the US compared to Europe.

Last month saw the Dollar index slump by -4.1%, its largest monthly fall in a decade. A surge in coronavirus cases and a deteriorating economic outlook has also driven US Treasury yields lower.

According to Kit Juckes, head of FX strategy at Societe Generale:

‘There is no doubt the Dollar has made a cyclical turn now … the Dollar is extremely expensive and that’s not sustainable given the current monetary policy stance, nor is it sustainable given the outlook for growth over the next few years.’

Added to this, Federal Reserve policymakers noted on Wednesday that the resurgence of coronavirus cases is slowing the economic recovery.

According to the Fed, growth has stalled once again in July after Covid-19 spiked in some areas of the country which resulted in fresh restrictions.

The Fed’s Vice Chair, Richard Clarida noted that growth could pick up in the third quarter and reach pre-Covid levels by the end of next year. Speaking to CNBC, he noted:

‘It will take some time, I believe, before we get back to the level of activity that we were in February before the pandemic hit.’

Pound US Dollar Outlook: Initial Jobless Claims and Non-Farm Payrolls in Focus

Looking ahead to this afternoon, the US Dollar (USD) could make some gains against the Pound (GBP) if risk appetite slumps.

Traders will be eagerly awaiting the latest US initial jobless claims data to see if claims for unemployment benefits have increased for the third week in a row. This would weigh on market sentiment and send investors flocking towards safer bets.

However, Friday could see the pairing claw back losses if the latest non-farm payrolls and unemployment rate boosts sentiment.

If more jobs are added to the world’s largest economy and the country’s unemployment rate declines in July, it will boost riskier assets. This will send the Pound US Dollar (GBP/USD) higher at the end of the week.

Millie Empson

Contact Millie Empson