The Pound US Dollar (GBP/USD) exchange rate is edging higher this morning after touching a five-week low on Friday.
The Bank of England’s (BoE) decision to leave interest rates unchanged continues to weigh on the Pound, while renewed Brexit-related tensions are also exerting pressure.
What’s Been Happening: GBP/USD Plunges on Fed and BoE
The Pound (GBP) sank last week after the BoE monetary policy committee voted by 7-2 to leave interest rates unchanged at 0.1%.
After investors had increasingly priced in a rate hike from the central bank following comments from BoE policymakers that hinted at a rise due to inflationary pressure, the decision to hold rates surprised markets and triggered GBP a selloff.
Sterling has also come under increased pressure from talks on the Northern Ireland protocol remaining deadlocked following reports the UK could trigger Article 16, potentially disrupting trade between the UK and EU.
Meanwhile, the US Dollar soared following the Federal Reserve’s announcement to taper its $120 billion monthly asset purchases by $15 billion a month, with the pandemic stimulus ending in mid-2022.
USD exchange rates also received support from upbeat data as the ISM non-manufacturing PMI jumped to a record high, and non farm payrolls revealed a bumper 531,000 jobs were added to the US economy in October.
However, a risk-on mood at the end of the week limited demand for the safe-haven currency and capped the US Dollar’s gains.
Three Things to Watch Out for This Week
- UK GDP
The Pound could come under pressure later in the week as forecasts point to UK third quarter GDP slowing to 1.5%, slowing from 5.5% in the second quarter.
After the BoE slashed it growth forecasts and raised inflation expectations, slowing growth could stoke volatility in Sterling due to concerns over the UK economic recovery.
- US Inflation Rate
With the headline US inflation rate forecast to have risen to 5.8% in October, USD exchange rates could experience volatility after the Federal Reserve reiterated its stance that elevated inflation is transitory.
- UK-EU Brexit-Related Headlines
Reports that the UK may invoke Article 16 due to a row over the Northern Ireland protocol could dent GBP exchange rates this week, as suspending parts of the protocol could lead to trade disruption between the UK and EU.
Pound US Dollar Exchange Rate Forecast
The Pound US Dollar exchange rate looks set for more volatility this week as UK-EU Brexit related trade tensions simmer, forecasted UK GDP growth slows, and US inflation rises.
At the same time, after some analysts labelled BoE governor Andrew Bailey the ‘unreliable boyfriend’, comments from the central bank’ policymakers may stoke additional volatility as some investors see the Bank’s credibility at risk.