The Pound US Dollar (GBP/USD) exchange rate hit a two-week high today as expectations rise that the Bank of England (BoE) will raise interest rates sooner than expected following more hints from members of the Monetary Policy Committee.
What’s Been Happening: US Dollar Dented by Dire Payrolls
The US Dollar (USD) dipped in the immediate aftermath of the much lower-than-expected US non farm payrolls release on Friday, rising only 194,000 instead of the 500,000 forecast.
However, the US Dollar recovered and held its ground as US Treasury yields strengthened, suggesting the Federal Reserve’s stance will remain unchanged and will announce tapering its bond-buying programme as soon as its November policy meeting.
Strong US data had received support earlier in the week with stronger-than-expected growth in the ISM services PMIs and ADP employment figures, and an extension to the US debt ceiling.
Meanwhile, the Pound (GBP) finished the week higher against the US Dollar after BoE chief economist Huw Pill warned of concerns over increasing inflationary pressure, suggesting the central bank would tighten monetary policy sooner than previously thought.
However, GBP exchange rates were limited through the week due to worries over a looming energy crisis in the UK as gas prices hit record highs and threaten shutdowns in UK industries.
Three Things to Watch Out for This Week
- UK Employment Data
Falling UK unemployment rate in August, from 4.6% to 4.5% forecast, and rising wage growth expected to show a 7% year-on-year increase may support the Pound on Tuesday. The data meeting forecasts will likely add to the BoE case for a sooner-than-expected interest rate hike.
- Federal Reserve Tapering Indicators
US data released this week could continue to support the case for the Federal Reserve announcing tighter monetary policy at its November meeting.
US inflation is expected to remain unchanged in September at 5.3%, while the Federal Open Market Committee (FOMC) minutes from the central bank’s latest meeting and retail sales data may provide additional insight to the Fed’s future policy.
- UK GDP
August’s GDP data may drive additional movement in Sterling as any surprises on the 0.5% growth forecast could lend extra support to GBP exchange rates.
Pound US Dollar Forecast: BoE and Fed Tapering Expectations Set to Drive Movement in GBP/USD
While US markets are closed today due to Columbus Day, high-impact data through the rest of the week could drive significant movement in the Pound US Dollar exchange rate.
Central bank tapering will likely continue to drive significant movement in the pairing, as will the threat of a looming energy crisis in the UK as wholesale gas prices soar in Europe.