Pound US Dollar near Month High on BoE Rate Hike Expectations

The Pound US Dollar (GBP/USD) exchange rate remains near one-month highs despite slipping this morning as a risk-off mood strengthens safe-haven demand for USD.

However, Sterling is limiting losses after Bank of England (BoE) Governor Andrew Bailey reiterated the central bank ‘will have to act’ on rising inflation, supporting rate hike expectations.

What’s Been Happening: BoE Interest Rate Rise Expectations Underpin the Pound (GBP)

The Pound (GBP) surged against the US Dollar as BoE policymakers strongly hinted to expect interest rate rises, with investors pricing in a hike by the end of the year or early in 2022.

Following a drop in UK unemployment to 4.5% from 4.6%, and UK GDP rebounding 0.4% in August from a -0.1% contraction in July, GBP/USD extended its gain on optimism over UK-EU talks on the Northern Ireland protocol.

Meanwhile, the US Dollar (USD) came under pressure from a risk-on mood that weighed on demand for the safe-haven currency through the second part of last week.

Stable but high US inflation figures at 5.4% and the Federal Open Market Committee (FOMC) meeting minutes also dented USD, with investors viewing the data as unlikely to alter the Fed’s tapering decision, which in turn left the improving market mood unaffected.

Better-than-expected initial jobless claims and a rally in equity markets supported the upbeat mood at the end of the week, in turn weighing on the ‘Greenback’.

Three Things to Watch Out for This Week: High-Impact UK Data in Focus

  1. UK Inflation Rate

The UK’s latest consumer price index (CPI) data will likely drive movement in GBP as forecasts point to inflation remaining at 3.2% in September, influencing investor expectations about the central bank’s next interest rate rise.

  1. UK Manufacturing and Services PMI Data

Private sector activity is expected to have slowed in the UK in October. With a dip in both the manufacturing and service sectors forecast, UK economic growth concerns could weigh on the Pound.

  1. Market Risk Appetite

Following China’s disappointing GDP growth data today, market sentiment has soured and lifted the safe-haven US Dollar.

More shifts in risk appetite driven by global energy problems, inflation jitters, and central bank rate hike expectations will likely cause movement in USD.

Pound US Dollar Forecast: GBP/USD to Struggle Extending Gains?

The Pound US Dollar exchange rate may struggle to extend recent gains through this week’s session if PMI figures show UK business activity is slowing as forecast.

With investors increasingly pricing in expectations for an interest rate rise from the BoE, further comments from policymakers may fail to have as significant an impact as last week’s hints.

At the same time, the US Dollar may find renewed support on safe-haven demand amid cautious trade and more signals from the Federal Reserve about tapering monetary policy.

Resulting movement in US Treasury yields will also likely cause swings in the US Dollar.

Andrew Roberts

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