GBP/USD Refreshes 11-Month Low on Rising Fed Rate Hike Expectations

The Pound US Dollar (GBP/USD) exchange rate renewed an 11-month low last week, as shifting expectations for the Federal Reserve to tighten monetary policy more aggressively in 2022 stoked volatility in GBP/USD.

What’s Been Happening: US Dollar Boosted by Fed Rate Hike Expectations

The US Dollar strengthened through the first part of last week ahead of the Thanksgiving holiday as US data releases increased expectations for the Federal Reserve to raise interest rates sooner than expected.

Federal Reserve minutes from its last policy meeting showed more of the central bank’s policymakers support accelerating tapering of its bond-buying programme and hiking rates in 2022. The rising PCE price index and falling initial jobless claims also increased bets of a Fed rate hike.

However, the US Dollar dipped on Friday as fears over the new highly-mutated Omicron Covid variant impacting global economic activity appeared to weaken expectations for a Federal Reserve rate hike.

Meanwhile, the Pound came under pressure last week despite better-than-expected UK manufacturing and services PMIs, as the data also revealed UK businesses suffered input costs hitting record highs.

Uncertainty surrounding the post-Brexit negotiations over the Northern Ireland protocol weighed on the Pound through much of the week.

Three Things to Watch Out for This Week

  1. BoE Governor Andrew Bailey Speech

Investors will be watching Bailey’s speech on Wednesday for any indications of an interest rate rise from the Bank of England (BoE) at its December policy meeting.

Given Bailey’s comments last week that he may be limiting forward guidance in the future, any speculative bets by investors may be limited.

  1. Covid-19 Omicron Variant

The developing situation regarding the newly discovered Covid-19 variant is sure to continue to affect markets throughout the week, particularly if any further restrictions are announced.

  1. US Non Farm Payrolls

The non farms payrolls are a key indicator of the US labour market’s performance, and with November’s figures currently forecast to reach their highest point since July, this could increase expectations for Fed rate hike and boost the US Dollar.

Pound US Dollar Forecast

Any developments regarding Covid-19 will affect the Pound US Dollar exchange rate in the coming week, with Brexit-related negotiations between the UK and EU also likely to provide some headwinds for Sterling.

Olivia Evershed

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