Pound US Dollar Exchange Rate Dives as BoE Keeps Interest Rates at 0.1%
(Updated 17:30 4/11/2021) The Pound dived to a one-month low against the US Dollar today, tumbling around 1.5% to $1.3490 at the end of Thursday’s European session.
Sterling suffered a sharp selloff after the Bank of England (BoE) monetary policy committee (MPC) members voted 7-2 to leave interest rates unchanged at 0.1%.
Before the MPC meeting, many investors had priced in an interest rate hike due to rising inflationary pressures and hawkish comments from BoE policymakers.
However, the decision surprised many investors and sent the Pound tumbling as they readjusted their positions.
The central bank’s revised forecasts added to GBP/USD losses.
Growth forecasts for this year were cut to 7%, lower than previous forecasts, while expectations for 2022 fell to 5% from 6%. Projections point to the UK economy returning to its pre-pandemic size in early 2022, instead of 2021.
At the same time, the BoE lifted its inflation forecasts, with a 5% peak expected next April.
The Bank reiterated its stance that the sharp rise would be temporary, and that it could hike rates if the economy and employment market recovers in the coming months.
The minutes said:
“The Committee judged that, provided the incoming data, particularly on the labour market, were broadly in line with the central projections in the November Monetary Policy Report, it would be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target.”
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Pound US Dollar (GBP/USD) Exchange Rate Drops ahead of BoE
After making strong gains yesterday following the Federal Reserve interest rate decision announcement, the Pound US Dollar (GBP/USD) exchange rate is falling back.
The Bank of England (BoE) interest rate decision is in focus today, leaving the Pound without clear direction in the lead up to the announcement, while the US Dollar is appearing to correct its position and making significant gains.
GBP/USD has fallen around 0.5% today to trade at $1.3627 at the time of writing.
US Dollar (USD) Rebounds from Post-Fed Losses
The US Dollar (USD) is surging across the board today and rebounding from last night’s Fed-driven losses.
While leaving interest rates unchanged, as expected, the Federal Reserve confirmed expectations that it would begin to taper its bond-buying programme.
The US central bank announced it would reduce its $120 billion monthly asset purchases by $15 billion per month, with the Covid-19 pandemic stimulus ending in mid-2022.
The Federal Reserve said in a statement:
“With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen.”
However, the Fed reiterated its stance on inflation and that it would wait for the job market to recover before further policy action.
The Fed added:
“The sectors most adversely affected by the pandemic have improved in recent months, but the summer’s rise in Covid-19 cases has slowed their recovery. Inflation is elevated, largely reflecting factors that are expected to be transitory.
“Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizeable price increases in some sectors.”
Fed Chair Jerome Powell also commented on raising interest rates, saying:
“We don’t think it is time yet to raise interest rates. There is still ground to cover to reach maximum employment.”
The US Dollar fell sharply in the aftermath of the announcement in what appeared to be profit taking, but has rebounded strongly today as US Treasury yields rise.
Earlier in yesterday’s session, the ‘Greenback’ had received modest support from better-than-expected employment and services PMI data.
The ADP employment change figures for October showed private US businesses hired 571,000 employees, above forecast of 400,000.
At the same time, October’s ISM non-manufacturing PMI jumped to a record high reading of 66.7, up from 61.9 in September and beat forecasts of 62.
Pound (GBP) Poised ahead of BoE Decision
Ahead of the BoE interest rate decision at lunchtime, the Pound (GBP) is lacking direction as markets hold bets until they find out whether the central bank will raise interest rates.
The monetary policy committee (MPC) meeting appears as though it is finely balanced as to whether enough of the nine policymakers will vote to raise interest rates.
Recent comments from MPC members appear to have shown a split in opinion on inflation and if the central bank should raise rates.
GBP exchange rates had strengthened yesterday after October’s finalised services PMI unexpectedly rose to a reading of 59.1, above 58 forecast, to indicate strong growth in the sector at its fastest pace since July.
Pound US Dollar Forecast: GBP/USD Set for More Volatility?
The Pound US Dollar exchange rate looks set for further volatility today with the BoE interest rate decision fast approaching.
Whether policymakers decide to raise interest rates or not, the Pound appears sensitive to swings.
If the BoE votes to leave rates unchanged, GBP exchange rates could weaken. Whereas a rate hike could boost Sterling.
Additional movement in the Pound will likely come from the tone the central bank takes, signals in its forward guidance on further plans to tighten monetary policy, and the outlook on inflation.
Meanwhile, USD investors will continue reacting to the Federal Reserve’s announcement to taper its asset purchase programme.
Ahead of the influential non farm payrolls figures tomorrow, trade data for September and initial jobless claims for last week may drive additional movement.